NEW REPORT: International trade can positively impact household welfare through reduced prices of consumer goods
A new IZA World of Labor report publishing tomorrow finds that households in some developing countries experience net gains in welfare as a result of international trade. These effects are progressive, benefitting in particular poorer households.
International trade is known to reduce real wages in certain sectors, leading to a loss of wage income for a segment of the population. However, recent research now summarized by the economist Beyza Ural Marchand of the University of Alberta, finds that cheaper imports can also reduce domestic consumer prices. The magnitude of this impact may be larger than any potential effect occurring through wages.
Consumption and income are the two main channels through which the welfare of a household may be affected by international trade. If changes in prices lower wages due to a country-wide reduction in the returns to unskilled labor, while simultaneously making the consumption basket cheaper, households may end up being better off when the net effect is considered. And according to the research Marchand presents this seems to be particularly true for poorer households. Hence international trade might in some cases lead to a reduction in poverty.
One of the most important tradable product categories, food and beverages, may constitute the entire budget for the poorest households. The percentage of income allocated to food decreases as income rises. This relationship indicates that any reduction in food prices will have a pro-poor effect, holding everything else constant. Even when other tradable goods such as manufactured goods are taken into account a number of studies found that the distributional effects of international trade were indeed progressive. The effects were pro-poor in India, for example, where 20% of the welfare gain at the bottom end of the distribution decreased to 10% at the top end of the distribution. The net effects were also found to be progressive in Argentina, China, Burkina Faso, and Gambia.
Even though the above findings are not valid in all countries, according to Marchand they show that policymakers need to consider the impacts on consumer prices when evaluating how trade affects households. Marchand suggests that any policy discussion on the impacts of trade on inequality, poverty, and household welfare should include (i) the potential effect on earnings, (ii) the potential effect on consumer prices, and (iii) how these effects are distributed across households with different incomes.
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