Analysis of the effects of trade opening on household welfare: an application to Chile, 1999-2006

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We conduct an ex-post analysis of the effects of trade policy changes on poverty and income distribution in Chile between 1999 and 2006. We follow the methodology developed by Porto (2006) and Nicita (2009), both of whom identify three channels of transmission through which a change in trade policy variables (e.g., tariffs) affects the welfare of households. The specific parameters that characterize each of the transmission channels are estimated independently. In the case of tradable prices, we use the standard methodology of the pass-through literature (Mallick & Marques 2008), and estimate the pass-through parameters for each tradable price group. In order to compute the effect of non-tradable prices we estimated price elasticities of these prices relative to tradable goods. The effect of trade liberalization on wage income is examined is a subsequent work. We find that the impact of the lower effective tariffs resulted in lower domestic prices and welfare gains. The overall effect was found to be positive, though small, and was larger in lower income households. The results also show that the dispersion variance of the benefits is high, especially in the first and second income quintiles. We also find that the adjustment of domestic prices to changes in border prices is not complete, and in some product groups, particularly food products, the pass-through is rather low. These results have implications for the design of complementary policies that seek to promote more competitive market structures that more effectively transmit the benefits of trade liberalization to consumers.