2.4 New Approaches to Measure Consumption Impacts

the level of household income. Only a few publications explore this question, though, primarily because of data limitations. As previously highlighted by Goldberg and Pavcnik (2007a), household surveys so far have had a limited focus on the selfemployed and a poor response rate to consumption questions.

Despite these challenges, the literature on consumption effects of trade integration has evolved in recent years, both in terms of methodological innovations and the aspects of globalization being studied (box 2.4). Whereas initial studies used reducedform methods that relied on household consumption surveys and simulated price changes at the product group level (Deaton 1989; Porto 2006), more recent studies have used structural models with cross-country trade flows to quantify these impacts (Fajgelbaum and Khandelwal 2016). There has also been a growing interest in the shifts in purchasing patterns of households from traditional stores to foreign retailers, which

BOX 2.4 New Approaches to Measure Consumption Impacts

New methodologies. One innovation is the use of reduced-form and quantitative trade models to quantify the impact of trade integration on income inequality through its effects on the price index relevant to individuals with different income levels using the methodology outlined by Deaton (1989). The most heavily cited study is that of Porto (2006), who explores the impact of Argentina’s trade reform on consumers by combining scheduled Argentine tariff changes under the Southern Common Market (MERCOSUR) with household expenditure shares across seven consumption sectors to simulate household inflation differences.

Since then, several studies have analyzed consumption and income channels to estimate the net effects of tariff reforms for developed and developing countries on welfare (Borusyak and Jaravel 2018; Hasan, Mitra, and Ural 2007; Nicita 2009; Nicita, Olarreaga, and Porto 2014; Ural Marchand 2012). Other studies have used quantitative trade models to estimate the impacts of changes in tariffs on consumption (Fajgelbaum and Khandelwal 2016). New aspects of globalization. Shifting the focus away from changes in traditional measures of trade (like tariffs or export prices), a few recent studies have concentrated on other aspects of globalization (like retail trade and tariff reductions for intermediate inputs). Atkin et al. (2018) attempt to capture the first-order effects of retail globalization by using a rich collection of microdata to assess the consequences of expanding foreign direct investment in the retail sector in Mexico.

Faber (2014) examines Mexico’s entry into the North American Free Trade Agreement to study the effect of input tariff reductions on the price changes of final goods of different quality. He shows that access to imported inputs reduces the relative price of higher-quality products in the country.

has led to retail trade as a source of potential benefits. Other studies have focused on how tariff reductions in intermediates affect consumer prices, given that a vast majority of developing country consumption has been increasingly driven by imported inputs rather than directly traded final consumer goods.

Whereas some studies just focus on estimating gains from trade through the consumption channel, others estimate the net welfare effect by studying both the consumption and income channels.

■ There are significant gains through the consumption channel and a pro-poor distributional effect across most countries. Using a quantitative modeling framework, Fajgelbaum and Khandelwal (2016) analyze how international trade affects individuals through the expenditure channel for multiple countries.

They find a pro-poor bias of trade in every country through the consumption channel. On average, the gains from opening to trade are 63 percent for the 10th percentile of the income distribution and 28 percent for the 90th percentile.

■ In many cases, though, these consumption gains are dwarfed by larger negative income effects, which lead to net welfare losses. In Mexico, for example, net gains are regressive, with larger gains for richer households overpowering smaller gains for poor households (Nicita 2009).

■ Consumption effects are smaller for nontradable goods and bigger for urban and border areas. The budget share of nontradable goods tends to be smaller among poor households, especially in developing countries. As a result, the direct effect of trade-induced price changes is more important for poor households, and impacts through nontradable goods remain smaller in several countries.

Delving deeper some recent studies highlight the gains from consumption and net gains from consumption and income and show that results vary across income distributions, regions, and different baskets of goods consumed by individuals.

India. Looking at just the consumption side, Fajgelbaum and Khandelwal (2016) find that opening up to trade in India is typically pro-poor, because the poor tend to consume a greater share of traded goods. The authors also show that moving from current trade shares to autarky would disproportionately hurt poor consumers more, but their approach does not address the supply side.

In another study, Ural Marchand (2012) addresses this gap by estimating the distribution of gains due to India’s trade reforms by simultaneously considering the effect on prices of tradable goods and wages. Even after considering the demand and supply side simultaneously, he also finds the reforms to be pro-poor: an 18 percent welfare gain at the

bottom end of the distribution versus 13 percent at the top end of the distribution between 1988 and 2000. These pro-poor gains are primarily driven by higher tariff reduction for commodities that are more important for poorer households and the higher share of unskilled labor among poorer households.

China. While assessing the impact of World Trade Organization accession on household welfare, Han et al. (2016) find welfare gains for almost every household across the per capita expenditure spectrum (at an average of about 7.3 percent). The distributional effect is strongly pro-poor: as high as 13 percent at the bottom end of the distribution but statistically insignificant at the top end. The authors also find that these net gains in welfare through nontradable goods and services are very small in magnitude, totaling only about 0.7 percent. They attribute this small economic benefit through nontradable goods to the small share of nontradable goods in consumption baskets across Chinese cities.

Argentina. Looking at both consumption and income effects, Porto (2006) finds that the regional Southern Common Market (MERCOSUR) trade agreement brought pro-poor net gains for Argentines. The poorest households experienced sizable gains versus a welfare loss for the richest households. These net gains were driven by pro-poor income effects, although consumption effects were found to be pro-rich. The study also finds the welfare effect through nontradable goods to be very small in Argentina, varying between 0.3 and 1.0 percent across the income distribution.

Mexico. Extending Porto’s approach by adding a link from trade policy to domestic prices, Nicita (2009) studies the impact of Mexico’s trade liberalization effects on the welfare of households. He finds that these reforms lower the domestic prices of several agricultural and manufacturing products and increase the wage gap between skilled and unskilled workers. Although all households gained from a cheaper consumption basket, households that were net suppliers of agricultural goods were hurt by the decline in income. Likewise, the downward pressure on unskilled wages hurt labor supplied by low-income households. Taken together, the net gains were regressive in Mexico, with larger gains for richer households overpowering smaller gains for poor households. There also were variations in these impacts across regions: states closer to trading markets, especially in the United States, benefited the most in terms of higher real income.

Sub-Saharan Africa. Incorporating three channels (production, skills, and consumption), Nicita, Olarreaga, and Porto (2014) find existing trade policies in six Sub Saharan African countries to be pro-poor. The key driver of this result is the protection of skilled labor, which predominantly benefits richer households, whereas the consumption channel is neither systematically pro-rich nor pro-poor.