Title：The Price and Welfare Effects of Tariff Reduction on Consumer Goods: Evidence from China

Authors：Ruobing Qin, Xue Bai, Hong Ma

Abstract：Between 2017 and 2019, China rapidly lowered tariffs on various consumer goods by adjusting the most-favored-nation (MFN) and Temporary Tariffs in four major waves. This paper examines the price and welfare effects of this recent tariff reduction by using monthly data on tariffs, imports, and retail prices during this period. First, we evaluate the pass-through of tariffs into import prices and the corresponding effects on import quantities and values to quantify the impact on the cost of imported products. We then examine how tariff reduction impacts the import varieties. Lastly, we estimate the impact on the domestic retail price indices and evaluate the potential improvement in consumer welfare at the aggregate level. We find that these waves of tariff reductions on consumer goods in China have caused significant declines in tax-inclusive prices, increased import quantities, and effectively reduced the total costs for importers and consumers. Our estimates suggest that the cost reduction for importers amounted to 1.51% of total imports of consumer goods in 2018. In addition, this decrease in cost significantly increased the varieties of imported products, further decreased the import price index, and improved welfare. In particular, a 10% reduction in tariffs on consumer goods would result in a 16.2% decrease in the import price index. We also find a significant impact of tariff reduction on lowering domestic retail prices through the pro-competitive effect, and the effect was more prominent for sectors with higher import intensities. After adjusting with import intensities, we find that a 10% decrease in import tariffs would result in a decrease in domestic retail prices of approximately 3% at an import intensity of 10%.

Keywords：Consumer Goods, Tariff Reduction, Price Effects, Welfare Analysis