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 brought about by
trade shocks that occurs among workers with the same level of earnings prior to the shock. While this
type of inequality does not affect the income distribution, it generates winners and losers at all income
levels and may thus affect political support for trade policy. 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. This characterization holds in a class of quantitative trade models allowing for a
broad set of preferences, including non-homothetic, and production functions. Taking this framework
to U.S. data, we find substantial heterogeneity in exposure and thus in the welfare effects of trade shocks
across workers, with horizontal inequality as the dominant force. Over 99% of the variance of welfare
changes from trade shocks arise within income deciles, rather than across. This finding runs against a
popular narrative that "trade wars are class wars."
Kirill Borusyak and Xavier Jaravel
30 November 2022 Paper Number POIDWP046.pdf
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