Study: Chinese Imports Substantially Reduce U.S. Inequality

by Patrick Brennan

With an election season filled with “economic patriotism” and China-bashing over, it’s worth just one more reminder how misguided both sides’ complaints and promises regarding trade were. I recently came upon a 2008 study that examined the effects of the rise in Chinese imports to the U.S. to the consumer price index, and its influence on inequality — increased imports from China, it turned out, reduced the implied increase in inequality by one-third between 1994 and 2005.

During the examined decade, inflation for households in the bottom decile has been 6 percentage points lower than it has for the top decile, the difference being between .5 and 1.1 points per year. This can be attributed to a few factors: During that period, prices for services and durable goods have risen more quickly than the prices for non-durable goods, on which the poor spend more than any other group, and the prices of the specific non-durable goods the poor buy has fallen relative to the prices of non-durable goods bought by the rich. And as they explain, “Chinese exports are highly concentrated in low quality goods that are disproportionately consumed by the poor [and] . . . in sectors where Chinese exports have increased the most, the decline in US non-durable goods’ prices have been the largest.”

Meanwhile, they find that, after examining the different CPIs faced by the rich and the poor, “corrected measures of inequality imply almost no change in inequality over this period, or a reduction in inequality of around 5.5 percent relative to conventional inequality measures.” Of that reduction, they find about one-third of the gap has been closed by the effects of Chinese imports, a stunning result, and one which should chasten those who worry that unskilled work lost to China hurts America’s poor the most. In fact, though it surely comes with costs to the poor, it may have the greatest benefits for them, too.

The paper, by Christian Broda and John Romalis of the University of Chicago’s business school, also documents the well-known fact that some (though not all) of the apparent rise in inequality over the past few decades can be explained away by changes in things like relative price indexes. 

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