Trade Shocks and Distributional Effects across Vertically Linked Industries: Evidence from U.S. Dairy

Abstract

This paper examines how trade shocks generate distributional effects across vertically linked industries, using the U.S. dairy sector under the United States–Mexico–Canada Agreement (USMCA) as a proof-of-concept setting. We develop a structural general-equilibrium framework that integrates production-network linkages, asymmetric export-side trade shocks, and worker-level heterogeneity to trace how policy-induced changes in trade costs propagate through the dairy value chain. Our results demonstrate that export-led expansion in downstream processing generates significant positive spillovers for upstream suppliers, even in the absence of direct export exposure. At the same time, the gains from liberalization are highly uneven across dairy processing industries. Crucially, we find that trade-induced horizontal inequality—variation in gains within income deciles— dominates vertical inequality. While the mean welfare difference across deciles is a marginal 0.101 percentage point, the within-decile dispersion between the 10th and 90th percentiles reaches 1.10 percentage points. These findings demonstrate that a worker’s welfare outcome depends fundamentally on their structural position within the production network rather than solely on their initial income level.