Trade Liberalization and Inequality: Re-examining Theory and Empirical Evidence

This paper re-examines the theoretical and empirical evidence regarding the impact of trade liberalization on income inequality and attempts to identify areas for future research. Since the 1980s, there has been a rise in inequality in both the developed and developing world. This was also the time when many developing countries liberalised their trade regimes, whichresulted in an increase in flow of goods and services, and capital and labour flows. Economists argue that trade based on factor proportions theory cannotaccount for the increasing wage inequality since the 1980s. Through this paper, the author has examinedthe theory as well as several recent studies thatindicate a potential role of international trade inaffecting wage inequality that operates throughchannels other than the Stolper–Samuelson typeeffects – New trade theory, residual wage inequality,industry wage premiums, skill biased technologicalchange (SBTC), global product sharing and New newtrade theories (heterogeneous firms). The mainquestion is – how to isolate the effects of trade fromother simultaneous changes in the economicenvironment that may have induced shifts in therelative demand and supply of skilled labour. Furtherresearch needs to be done on how important are thesenew channels relative to SBTC in explaining growinginequality in these countries. The study can be furtherextended to include not only the impact ofinternational trade, but also the effect of financialglobalization on inequality.

Keywords: Trade Liberalization, Inequality, New Trade
Theory, New New Trade Theories

One of the resilient trends has been a rise in withincountry inequality in a number of countries. This rise in inequality, whether measured in terms of income, wages or assets, has been observed in both the developed and developing worlds (Norris, Kochhar, Suphaphiphat, Ricka & Tsounta, 2015). Read Full Article