Trade Policy Shocks and Consumer Prices

ABSTRACT How do trade policy shocks affect consumer prices? By constructing a novel dataset with both US import prices and barcode‐level consumer prices, I examine the pass‐through of import prices into consumer prices and its heterogeneity across consumers. I find that the pass‐through is incomplete via the direct effect: a 1% increase in import prices leads to an around 0.2%–0.4% increase in consumer prices. However, after accounting for the response of domestic prices, the overall pass‐through is significantly larger. In addition, the pass‐through is higher for consumers with lower income and in more competitive, and less remote markets. To explain these findings, I model the retail margin with variable markups and extend it to allow for consumer price heterogeneity. I show that the differential pass‐through arises from the outlet and the expenditure channel. Lastly, a quantitative exercise estimates the increases in consumer prices during the US‐China trade war.