Free trade and relative poverty nexus: Revisiting an age-old debate using a panel fixed approach

Abstract

As trade volume has exponentially increased over the past decades, we investigated the impact of free trade on relative poverty using data from 123 countries between 1995 and 2018. In this investigation, we used three variables for free trade, reflecting three aspects of free trade, trade openness, trade barrier or trade freedom, and trade policy, and two variables for relative poverty; the income share of the bottom 10% and the bottom 20%. When economic growth, polity and socioeconomic factors are controlled for, we found that (1) trade openness hurts the poor, increasing relative poverty regardless of industrialization, (2) trade freedom benefits the poor, decreasing relative poverty although the poor in industrial countries are hurt by trade freedom, and (3) WTO membership as a proxy for a trade policy is not statistically significant to the poor, although it seems beneficial to the poor. Given these results, we conclude that free trade lowers relative poverty, implying that the income shares of the bottoms 10% and 20% can increase more than by 0.9%p and 1.5%p, respectively, as free trade is promoted.