Buying Strawberries in Winter

Over the past three decades, global trade has more than tripled the variety of international goods available to U.S. consumers. New research measures how consumers have benefited from this growth in variety.

It is traditionally acknowledged that international trade benefits consumers by offering the same goods at lower prices. However, trade also gives consumers the ability to purchase goods they would not otherwise have access to, and it increases the number of varieties in the marketplace.

"The United States used to import coffee from about 25 countries," notes University of Chicago Graduate School of Business professor Christian Broda. "Now the United States imports coffee from 52 countries. We import beer from three times more countries than we used to. Overall, consumers have more choices for a wide range of products."

The coffee chain Starbucks highlights one example of how consumer satisfaction increases from variety. The coffee offered in Starbucks stores includes varieties from Brazil, Colombia, Costa Rica, Ethiopia, Guatemala, Indonesia, Mexico, New Guinea, Panama, Yemen, and Zimbabwe.

"Consumers value this variety for its own sake, and not just because of lower prices or higher quality," says Broda. "When comparing two types of coffee, you may not think one is necessarily better, but sometimes you'd prefer one type of coffee to another. Being able to buy exactly the coffee you're in the mood for makes you better off as a consumer."

The improvement in consumer welfare via increased variety has tended to go unmeasured. In most economic statistics, coffee is coffee and beer is beer. However, in the recent study "Globalization and the Gains from Variety," Broda and David E. Weinstein of Columbia University argue that by ignoring the increased choice that international trade provides, economists have underestimated the gains from globalization for the United States. Their study is the first to measure the consumer gains from new imported varieties.

"We usually believe that more choice is better," says Broda. "Since trade provides U.S. consumers with more goods from which to choose from, it is important to quantify the value of variety."

In the United States, trade has been growing faster than Gross Domestic Product (GDP) for many decades. The rise in U.S. trade has been accompanied by a dramatic increase in the number of imported varieties. Between 1972 and 2001, the variety of imported goods more than tripled.

How beneficial is variety to U.S. consumers? To answer this question, Broda and Weinstein measured the quality, quantity, and degree of substitution between all imported varieties of products.

Broda and Weinstein find that U.S. consumers were willing to pay $260 billion a year, or nearly 3 percent of their income,to have access to the wider set of varieties available in 2001 rather than the set of varieties available in 1972. This represents a large gain from trade that had not been previously quantified, since estimates of the traditional gains are confined to changes in the prices of existing products.

"When you consider your opinion on globalization, it's important to take into account that having access to new products increases your choices, and has value," says Broda. "Next time you buy strawberries in winter, remember that it's international trade making such a purchase possible."

Why Do Varieties Matter?

Classical trade theory argues that the elimination of international trade barriers improves welfare by reducing the wedge between domestic and import prices. Countries gain from trade because the cost of consumption falls relative to income.

New models of international trade provide an entirely different reason for the gains from trade. From this perspective, countries gain from trade not because the price of any individual good changes, but because consumers in open economies have access to a wider variety of goods than consumers in closed economies.

Broda uses the example of living in a city versus living in a rural area to illustrate the way consumers may benefit from access to variety.

"Would you rather go to the same restaurant every night or try different restaurants?" asks Broda. "People think about settling in different cities because of the variety of amenities available, which is one reason why some people want to settle in Manhattan instead of a rural area."

Broda and Weinstein use highly disaggregated U.S. trade data to analyze the gains from variety. They define a variety as the import of a specific product category from a specific country, for example, "French red wine." In the data used for a typical year, U.S. trade is broken down into approximately 150,000 varieties of 12,000 different goods.

The simplest way to measure the growth of imported products is to compare the number of varieties in each product category at the beginning of the sample period with the number of varieties at the end of the period.

The data revealed several major trends in the composition of U.S. imports from 1972 to 2001. In this period, the number of products imported by the United States nearly doubled, while the total number of varieties increased from 71,420 to 259,215, an impressive tripling of varieties.

The relative importance of various countries as exporters to the United States also has changed in recent decades. Canada has moved from fourth to first place, and Mexico from 13th to 8th place. The sharp rise in rankings of these two countries may reflect their adoption of a free-trade policy.

Fast-growing countries such as China and Korea have advanced rapidly as import sources for the United States. In 1972, China exported only 510 varieties of goods to the United States. By 2001, China exported 10,199 varieties of goods to the United States. Although Chinese firms account for only 9 percent of all imports to the United States in 2001, there is at least one Chinese firm selling a product in almost two-thirds of the U.S. import market.

The twenty-fold increase in the number of goods exported by China has elevated China from 29th in the 1972 ranking of exporters to 4th in 2001. India has risen from 23rd in 1990 to 13th in 2001, with the sharp rise in exports following the country's liberalization in the last decade. The results highlight the importance that the industrialization of Asia has played in the creation of new varieties of goods available to U.S. consumers.

On the other extreme, countries such as Japan and Argentina that faced economic crises during the 1990 - 2001 sample period have seen a substantial drop in the variety of goods they export.

Countries that exported and grew more tended to disproportionately increase the number of varieties they exported to the United States.

Consumer Welfare Gains from Variety

Broda and Weinstein suggest that the gains from variety depend on a number of factors. First, quality variation across varieties may matter. Presumably, most Americans care more about having access to French red wine than Japanese red wine.

Second, import quantity matters. All things being equal, people care more about variety growth in sectors that occupy a large share of consumption, such as automobiles.

Finally, the degree of "substitutability" among varieties also is important. If varieties of a particular good are perfectly interchangeable for consumers, then having two varieties of that good will have no impact on welfare. For example, most consumers care about the price and grade of their fuel, but not which country it comes from. In goods where varieties are quite distinct, such as Irish vs. American beer or Italian vs. American cheese, U.S. consumers will benefit from the opportunity to obtain both varieties.

Using the price and quantity of the millions of varieties imported by the United States in the period from 1972 to 2001, Broda and Weinstein uncover the relative quality of new varieties and how different the new varieties are from existing ones. "Consumers value having access to more international products," says Broda. "This is an important source of gains from globalization."

A More Open World

"Failing to account for the gains from the introduction of new varieties ignores an important element in the arguments for free trade," says Broda. "Traditional gains from trade tend to be relatively small, but our study finds large welfare gains from trade. Even if you don't think trade can lower prices for consumers, you should still consider the gains from globalization that come through new access to goods."

One of the central questions in international economics has been the impact that new products and the growth in varieties have on economies. Broda and Weinstein's results suggest that globalization has had substantial benefits on welfare through the increased import of new varieties.

"Imagine if you were only able to buy one particular model of American car," says Broda. "Globalization, on the other hand, allows you to browse through hundreds of varieties of cars from around the world. International trade increases the amount of browsing a consumer can do. After all that browsing, you'll pick your ideal variety, which might not be the American car."

"I'm not only convinced that having more choice is beneficial for consumers," says Broda, "I'm convinced that this is an important force behind globalization. Those who remain skeptical about the benefits of globalization need only look around the supermarket to see the pervasiveness of imported varieties in the U.S. markets."