Quality and Unequal Gains from Tariff Liberalization

Abstract

We study how product quality shapes the unequal consumer gains from trade liberalization by examining the effect of China’s drastic tariff reduction on imported passenger vehicles in 2018. Combining data on prices, sales, and attributes for the universe of new passenger vehicles, we find that lower tariffs lead to larger consumer welfare gains in richer cities. This pro-rich bias of tariff reduction is explained by two mechanisms. First, imported cars are of higher quality than domestic cars, and car consumption in richer cities is more skewed towards imported cars. Second, lower tariffs lead to larger price reductions for higher-quality imported and domestic cars. The larger tariff-pass-through for high-quality cars can be explained by the pattern of quality specialization and firm’s strategic interactions in pricing.

Keywords: Quality, tariff pass-through, real income inequality, strategic interactions

JEL Classification: F0, F13, F14