This paper investigates the tariff pass-through mechanism and household welfare in urban China. We
estimate how market structure, specifically the size of the private sector, affects the transmission of prices
from the border to consumers by using household survey data from urban China. Our results suggest that
the tariff pass-through rates at the border are higher than the pass-through on consumer prices, and an
increase in competition in Chinese cities is associated with higher tariff pass-through rates. This effect
works both through the distribution sector, and through the manufacturing sector of the final goods. By
incorporating the changes in consumer prices of tradable and nontradable goods, we next investigate how
trade liberalization affects household welfare through changes in the cost of consumption. The results
show that WTO accession of China was associated with welfare gains to almost every household across
the per capita expenditure spectrum, and that the distributional effect is strongly pro-poor. The average
welfare gain of WTO accession on Chinese households is estimated to be 7.5 percent.