Over the past two decades the US economy has become more open to trade. Over this period, trade has increased dramatically as a fraction of GDP. That is, the proportion of imports and exports has grown as a share of the goods and services produced in the United States.
Economists widely agree that this has been a positive development for the economy as a whole. Opinions among the broader public, on the other hand, have been more mixed. In 2018, 56 percent of respondents to a Pew Research poll asserted that “free trade agreements between the U.S. and other countries have generally been a good thing for the U.S.,” while 30 percent claimed they had generally been a “bad thing” (Bradley, 2018). These differences of public opinion may reflect the fact that trade affects different types of households—for example, households in different parts of the income or wealth distribution—differently. Trade affects households through two primary channels, adjustments in the labor market (both job losses and gains) and reductions in prices of goods and services. A growing literature has explored how the effects of labor market adjustments are distributed across households, but less attention has been given to the distribution of benefits arising from price reductions.
In this Commentary, we examine how the consequences of international trade are distributed across households through both channels. The labor market effects are well-documented, and we start by summarizing these. Then we turn to the price effects and highlight our own new research into how these benefits are distributed. We find that lower-income households, though possibly more exposed to the labor market costs, benefit more than do higher-income households from the reduction in prices that trade induces. This is because low-income and low-wealth households use a larger fraction of their expenditures on tradable goods and services. Furthermore, we find that the differences in the price effects across the income and wealth distribution are nonnegligible; rather they are commensurate with the differences in labor market costs measured in other papers. Overall, this suggests that the gains from trade are more equally distributed than previously thought.
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