Market Structure, Imperfect Tariff Pass-Through, and Household Welfare in Urban China

This paper investigates the Chinese tariff pass-through mechanism. We estimate how market structure, specifically the size of the private sector, affects the transmission of prices from the border to consumers by using household survey data from urban China. Our results suggest that changes in trade policy are not perfectly transmitted to the consumers and imperfections in the local market partially isolate households from the effects of trade policies. Incorporating the price changes of tradable and nontradable goods, we investigate how trade liberalization affects household welfare through changes in the cost of consumption. Our results show that trade liberalization, particularly China’s WTO accession, brings welfare gains to almost every household across the per capita expenditure spectrum, and that the distributional effect is strongly pro-poor.