Trade with China and the poor

Awhile back John Minto had a rant in the Christchurch Press on the China free trade deal. My comments on the piece are here. At one point Minto wrote

... it [trade with China] will not improve the standard of living of New Zealanders. In fact, for the many of the most vulnerable it will be disastrous.

Now I learn from Marginal Revolution about a new paper that looks at Inequality and Prices: Does China Benefit the Poor in America? (pdf). The paper argues

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

The emphasis at the end is mine. So the poor in the US do benefit from trade with China, the cost of living of the poor is being held down by trade with China. What we see is that inflation rates for the richest ten percent outpaced inflation rates for the poorest by about 6 percent. This wipes out two thirds of the rise in inequality during these years, and China is responsible for half of that reduction. Inequality is rising because of an education slowdown, see here, but trade helps to keep it lower. So the protectionists would not just make America poorer but also more unequal. Why should it be any different here? But I'm sure John Minto will tell us that it is different here.

Tyler Cowen adds an interesting aside.

Broda and Romalis also find that the poor are more likely than the rich to buy newer goods. Because of the lag in how quickly the CPI tracks new products, the researchers argue that once this "new goods bias" which serves to keep official inflation rates higher than they actually are since newer goods are typically cheaper, is factored out, inequality between the rich and the poor between 1994 and 2005 may not have changed at all.