Quantifying the Distributional Consequences of Trade and Policy Responses

Distributional consequences of trade are manifold and are at the forefront of major policy debates. There are insufficient mechanisms to insure against trade losses while preserving the gains for the winners. Similarly, labor has limited ability to move to the locations, sectors, and firms that gain from trade. All these factors contribute to inequality as a result of trade shocks. This project contributes to this debate in three ways. First, the project develops a quantitative framework to examine the distributional effects of trade. Second, the project uses this framework to evaluate the extent to which households can adjust through migration, labor supply, and self-insurance to changes in trade exposure, and, thus quantify the welfare effects of trade. Third, the project empirically examines how households adjust consumption in response to trade shocks.

This project develops a dynamic quantitative framework with incomplete markets, Ricardian Trade, and frictional labor markets. The framework is calibrated to match aggregate and difference-in-difference evidence for the US and then study the transition dynamics of the economy in response to a trade liberalization. The calibrated model is used as laboratory to answer questions on the aggregate effects and the heterogeneity in the gains and losses from trade. The quantitative framework further highlights an open, unstudied issue regarding the labor-market-induced consumption effects of trade. This project provides new evidence on these effects by focusing on recent trade policies between 2017 and 2019.