Origin of Goods and Unequal Consumer Gains from Trade Liberalization

We introduce the origin of goods in an otherwise standard framework to study the impact of tariff reductions on household cost-of-living. Our framework distinguishes three origins: import, domestic production, and household production. We adopt this framework to estimate the unequal consumer gains from tariff reductions in Cambodia, using a unique household survey data with detailed expenditure records on goods and services from each origin. We find that richer households have larger expenditure shares on imported goods and smaller expenditure shares on home-produced goods. Price responses to tariff changes are strongest for imported goods and weak for home-produced goods. As a result, tariff reductions generate a strong pro-rich effect, with households at the 80-90 income percentile gaining 40% more than those at the 0-10 percentile. We show that ignoring origins in the cost-of-living measurement can substantially underestimate the pro-rich effects of trade liberalization. We also analyze why richer households have larger expenditure shares on imported goods and provide evidence consistent with trade models with non-homothetic preferences.