The consumption side of trade shocks: Inequality dynamics and luxury imports

We study how a large, exogenous trade shock — triggered by China’s accession to the WTO in 2001 — reshaped income, inequality, and import behavior across Brazilian regions. Using a shift–share instrument based on pre-shock export structures, we show that regions more exposed to China’s demand boom experienced faster growth in per capita income and larger increases in within-region inequality relative to less exposed areas. These changes, in turn, led to rising import values and shifts in composition, especially toward consumption and medium- to high-tech manufactured goods. To analyze these shifts, we classify goods by necessity and luxury status using Brazilian household data and introduce a complementary classification based on the spending patterns of high-income households in the United States. Luxury imports rose most in regions that were initially more unequal or experienced sharper post-shock inequality growth, consistent with non-homothetic preferences and broader theories of stratified consumption. Our findings highlight inequality as a key channel through which trade shocks shape regional import demand in developing economies. • We exploit China’s WTO entry to study trade shocks across Brazilian regions. • Trade shocks raised average income and inequality in more exposed regions. • These gains reshaped imports, raising values and shifting demand toward consumption and tech goods. • We classify goods using Brazilian and U.S. data and show trade shocks drove luxury import growth in unequal or inequality-rising areas. • Inequality mediates how trade shocks reshape regional import composition.