How do trade policy shocks affect import and consumer prices? How does the impact on prices vary across consumers? Answers to these questions would help us better understand the transmission mechanism of trade policy shock and its implications for consumer welfare.

In my dissertation, I provide both theoretical and empirical evidence to these questions. The first chapter examines the pass-through of import prices into consumer prices and the welfare implications of trade policy shocks. Using a novel dataset with both US import prices and barcode-level consumer prices, I find that the pass-through of import prices to consumer prices is incomplete: a 1% increase in import prices leads to a 0.3 to 0.4% increase in consumer prices. To explain these findings, I build on Burstein and Gopinath (2014) to model the retail margin with variable markups. I show that the pass-through rate depends on the magnitude of the distribution margin and the markup elasticity.

In the second chapter, I extend the theoretical framework to explore the heterogeneity in pass-through rates across consumers. I show that a differential pass-through arises through two channels. The first one captures the fact that the pass-through rate varies across retail outlets for the same variety and the second channel focuses on the different expenditure shares across varieties with heterogeneous pass-through rates. Exploiting the rich demographic information in Nielsen barcode data, I find that the pass-through rate is higher for consumers with lower income and in markets with higher retail industry competition. By decomposing the consumer-specific price index, I show that the differential pass-through rates are largely driven by the differences in expenditure shares across varieties.

I then conduct a quantitative exercise and show that the consumer prices of affected goods would increase 1-2% on average in response to a 25% tariff on consumer goods from China. The increases in prices are 50% higher for lower-income and higher for consumers living in big cities of the Northeast region and the West Coast.

The final chapter investigates the effect of trade policy uncertainty on US imports from China during the trade war episode. By comparing the differences in imports before and after the announcement of tariffs across products, I find that the decline in imports after tariff announcement is larger for products with a larger increase in uncertainty (risk), which suggests uncertainty reduces imports. Furthermore, I find the intensive margin, the adjustment within HS10 products, plays a more important role in reducing imports. There is no significant difference in entry and exit rates across products with different changes in risk.