The impact of trade agreements on consumer welfare

Giuseppe Berlingieri, Holger Breinlich and Swati Dhingra

A central tenet of trade theory is that lowering trade barriers increases welfare. Trade agreements between countries lower trade barriers on imported goods and provide welfare gains to consumers from increases in variety, access to better-quality products and lower prices. While a large literature estimates the overall gains from trade, less is known about the effects of specific trade agreements and the channels through which they increase welfare.

In this School of Economics working paper, published in the Journal of the European Economic Association, Giuseppe Berlingieri, Holger Breinlich and Swati Dhingra estimate the impact of trade agreements on consumer welfare through the channels of increased variety, better quality and lower prices, using the new generation of bilateral agreements implemented by the European Union between 1993 and 2013. For the EU as a whole, they show that trade agreements increased quality by 7% on average but did not affect prices or variety. They also find a high degree of impact heterogeneity across EU countries, trading partners and the type of trade agreement, with high-income EU countries seeing much stronger quality increases and larger overall consumer benefits.

The authors also calculate by how much changes in quality, variety and prices affect the consumer price index (CPI). Depending on the underlying estimates and assumptions, the cumulative effects of trade agreements between 1993 and 2013 translate into a cumulative CPI reduction of 0.24%-0.49% for the EU12 as a whole. Expressed in monetary terms, this represents savings to EU consumers of between €24 and €49 billion every year from 2013 onwards, compared to a situation without trade agreements.

Journal of the European Economic Association, "The Impact of Trade Agreements on Consumer Welfare", by Giuseppe Berlingieri, Holger Breinlich and Swati Dhingra.

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