DP11148 | The Impact of Trade Agreements on Consumer Welfare

Publication Date

03/02/2016

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Abstract

A central tenet of international economics is that trade liberalization provides welfare gains. This paper contributes to the literature on gains from trade by estimating how trade agreements impact the consumer price index, and by quantifying the sources of their impact on welfare. We infer quality of imported products by estimating demand-side elasticities for the European Union (EU) between 1993 and 2013. Having inferred quality, we estimate the contribution of lower prices, better quality and greater variety to welfare gains from trade agreements. Joining a trade agreement increases welfare through access to higher quality imports. Quality rises by 7% on average, which translates into a cumulative reduction in the consumer price index of 0.18% during the period. Ignoring the quality channel under-estimates the gains from trade agreements because unit values were not significantly impacted by the new agreements.