On the Heterogeneous Welfare Gains and Losses from Trade

How are the gains and losses from trade (disruptions) distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with non-homothetic preferences---to generate the documented relationship between tradable expenditure shares, income, and wealth---and uninsurable earnings risk---to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade on households along the income and wealth distribution. In a numerical exercise, we increase trade costs by 20 percentage points and allow the economy to transition to a new steady state. We find that households in the lowest wealth decile experience welfare losses over the transition, measured by permanent consumption equivalents, that are 35 percent larger than those in the highest wealth decile. Finally, we find that the distributional impacts of trade significantly depend on how the tariff revenue is spent. In particular, using tariff revenue to reduce labor income taxes is close to welfare-neutral.