The Consumption Side of Trade Shocks: Inequality Dynamics and Luxury Imports

We study how a large, exogenous trade shock --- triggered by China’s accession to the WTO in 2001 --- reshaped income, inequality, and import behavior across Brazilian regions. Using a shift-share instrument based on pre-shock export structures, we show that regions more exposed to China’s demand boom experienced increases in income per capita and within-region inequality relative to less exposed areas. These changes, in turn, led to rising import values and a shift in import composition, particularly toward consumption goods and medium- to high-tech manufactured products. To interpret these patterns, we classify goods by necessity and luxury status using Brazilian household survey data and develop a complementary ``demonstration luxury'' classification --- designed to capture status-oriented goods --- based on U.S. consumption patterns. Luxury imports rose most in regions that were initially more unequal or experienced sharper post-shock increases in inequality, consistent with non-homothetic preferences and status-driven consumption. Our findings highlight inequality as a key channel through which trade shocks shape regional import demand in developing economies.