What is the nature of the distributional effects of trade? This paper demonstrates conceptually and empirically the importance of “trade-induced horizontal inequality,” i.e. inequality that occurs among workers with the same level of earnings before the trade shock. This type of inequality does not affect the income distribution but generates winners and losers at all income levels. To quantify the horizontal inequality and changes in the income distribution induced by trade in a data-driven way, we develop a characterization of the welfare impacts, governed by simple and intuitive statistics of labor market and consumption exposure to trade. In the U.S., we find substantial heterogeneity in exposure and thus in the welfare effects of trade shocks across workers. Over 99% of the variance of welfare changes from trade shocks arises within income deciles. These findings run against a popular narrative that “trade wars are class wars.”
Kirill Borusyak and Xavier Jaravel
1 July 2024
Journal of International Economics 1502024
DOI: 10.1016/j.jinteco.2024.103935
https://www.sciencedirect.com/science/article/pii/S002219962400062X
This work is published under POID and the CEP's Trade programme.