What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

Jaravel, Xavier; Sager, Erick

doi:10.17016/FEDS.2019.068

Working Paper

What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

Abstract: This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines.

Keywords: China; Inequality; Markups; Prices; Trade;

JEL Classification: F10; F13; F14;

https://doi.org/10.17016/FEDS.2019.068