Import exposure and welfare effects from the expenditure channel: The case of Mexico

A rise in import competition can put downward pressure on local prices increasing consumer's welfare, but these gains might be unequal across households depending on the basket of goods consumed. Using a consumer price index that varies at the product and city level from Mexico, this paper analyses the impact of import competition from low‐wage countries, and particularly China, on price growth between 2002 and 2017. I find that the trade shock impacted prices. Had import competition remained unchanged, the 15‐year change in the consumer price index would have been seven percentage points higher, on average across all goods, with a much larger impact on the products highly exposed to the import competition. Second, using microdata from a household expenditure survey I find that all the households benefited from this access to cheaper goods, but the low‐income households benefited more. Finally, I show that the China shock only had a small effect on the evolution of the per capita expenditure inequality observed during this period.