The Distributional Effects of Trade: Theory and Evidence from the United States

Are the gains from trade unequally distributed in society? This paper presents new evidence on the distributional effects of trade on education groups in the U.S. through both consumer prices (expenditure channel) and wages (earnings channel). Our analysis, guided by a simple quantitative trade model, leverages linked datasets that cover the entire U.S. economy and include detailed spending data on consumer packaged goods and automobiles. First, we show that the expenditure channel is distributionally neutral due to offsetting forces. College graduates spend more on services, which are largely non-traded; however, their spending on goods is skewed towards industries, firms, and brands with higher import content. Second, on the earnings side, we find that college graduates work in industries that (1) are less exposed to import competition, (2) export more, (3) are more income-elastic, and (4) use fewer imported inputs. The first three forces cause trade liberalizations to favor college graduates; the fourth has the opposite effect. Finally, we combine and quantify the expenditure and earnings channels using the model. A 10% reduction of all import and export barriers generates a modest increase in inequality between education groups, primarily due to the earnings channel. Welfare gains are 16% higher for college graduates, whose real income increases by 2.02% compared to 1.74% for individuals without a college degree. Reductions of import barriers with China have qualitatively similar implications.