Do Free Trade Agreements Affect Income Inequality?: An Empirical Investigation

Abstract

The number of preferential trade agreements through FTAs between countries and groups of countries has greatly increased during the last two decades. Despite numerous studies on the effect of trade on income inequality since the Hecksher-Ohlin model and the Stolper-Samuelson theorem, a possible linkage between FTA and income inequality has received little attention and had not been studied thoroughly. This study examines the effect of international trade through FTA on intra-national inequality of income. The empirical linkage between FTA and income inequality measured by the Gini index is investigated by estimating a series of augmented income inequality regressions using a data set of 132 countries. Main findings from the estimation show strong evidence for the impact of FTA on income inequality. There is a strong linkage between the number of FTA notifications to WTO and income inequality. However, overall trade openness is not found to affect income inequality. The effect differs between goods notification and services notification within FTAs: the higher goods notifications bring a reduction in income inequality, while the higher services notifications raise income inequality.