The Price and Welfare Effects of Tariff Reduction on Consumer Goods: Evidence from China

The Moynihan Institute, and the program for Trade, Development and Political Economy invites you to virtually join Xue Bai, associate professor from Brock University for a talk on "Tariff Reduction on Consumer Goods."

Between 2017 and 2019, China rapidly lowered tariffs on various consumer goods by adjusting the Most Favored Nation (MFN) and Preferential Tariffs in four major waves. This paper examines the price and welfare effects of this recent tariff reduction by using monthly data on tariffs, imports, and retail prices in this period.

First, we evaluate the pass-through of tariffs into import prices and the corresponding effects on import quantities and values to quantify the impact on the cost of imported products. We then examine how the tariff reduction impacts the import varieties. Lastly, we estimate the effect on domestic retail price indices and evaluate the potential improvement in consumer welfare at the aggregate level.

We find that these waves of tariff reductions on consumer goods in China have caused sizable declines in duty-inclusive prices, increased import quantities, and effectively reduced the total cost to the importers and consumers. Our estimates suggest that the reduction in cost to importers amounts to 1.50% of total imports of consumer goods in 2018. In addition, this decrease in cost significantly increased the varieties of imported products, further decreased the import price index, and improved welfare. In particular, a 10% decrease in tariffs on consumer goods will result in a 16.2% decrease in the import price index.

We also find a significant impact of tariff reduction on lowering domestic retail prices through the pro-competitive effect, and the effect is more prominent for sectors with higher import intensity. After adjusting with import intensities, we find that a 10% drop in import tariffs will bring roughly a 3% decrease in domestic retail prices, with an import intensity of 10%.

Xue Bai is an associate professor in the Department of Economics at Brock University. Her research interests are international trade, industrial organization, economic development and applied microeconomics. She received a Ph.D. in economics from Pennsylvania State University in 2014.