Who Helps Poor Americans? China and Walmart

By Patricia Houlihan
Published: October 24, 2008
Chinese factory workers

Image by Media Bakery

Globalization has been blamed for income inequality in the United States, but research by Christian Broda and John Romalis shows that inequality has been unchanged over the last decade, and that cheap goods imported from China — and sold at places like Walmart —actually boost the standard of living for the poorest Americans.

On the campaign trail, candidates can be quick to demonize free trade with such countries as China, whose exports of consumer goods have increased sharply in the past decade. While critics claim it has driven ever-widening income inequality, a study shows that correctly measured, inequality has not increased and that globalization may have actually eased hardships for the poor.

In "Inequality and Prices: Does China Benefit the Poor in America?" professor of economics Christian Broda and associate professor of economics John Romalis note that poor families in America spend a higher proportion of their income on goods that are more closely affected by trade. Because Chinese imports have caused prices to plummet for those who shop for such items at superstores like Walmart and Target, poorer Americans have benefited disproportionately from lower prices.

However, this differential impact of lower prices between rich and poor is not recorded in current measures of inequality. As Broda wrote in the Financial Times in June, "National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods." Looking at data from 1994 to 2005, Broda and Romalis show that inflation in the richest 10 percent of households was 6 percent higher than in the lowest 10 percent. "This means that real inequality in the United States, if measured correctly, has been roughly unchanged," Broda wrote in the Financial Times.

They argue that part of the lower inflation faced by the poor is thanks to China. Since Chinese exports tend to be the low-quality nondurable products that comprise the bulk of what poor people buy, Broda and Romalis wrote, "we find that about one-third of the relative price drops faced by the poor are associated with rising Chinese imports." Their findings hold up even in the face of rising food prices, the researchers say.

Their study drew the attention of the Economist, the New York Times, and the South Morning China Post, as well as the New Yorker magazine, which said, "The reality is that if we toughen our trade relations with China, the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain — in the form of higher prices — far more quickly and more directly than rich Americans will."

Broda said policy makers — and political candidates — need to remember the benefits of globalization. "We need to remind politicians and the public that the gains from trade are broadly shared," he wrote. "Every time the discussion of trade is diverted toward problems facing specific producers—from farmers in France to textile workers in the United States— the central point is missed. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford."

 

 

Last Updated 5/14/09