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

Abstract

The number of preferential trade agreements through FTAs between countries has greatly increased during the last two decades. Despite numerous studies on the effect of trade on income inequality, a possible linkage between FTA and income inequality has not been thoroughly studied. This study examines the effect of international trade through FTA on intra-national income inequality. The empirical linkage between FTA and income inequality as measured by the Gini index is investigated by estimating a series of augmented income inequality regressions using a data set of 109 countries. This paper finds evidence that there is a strong linkage between the number of FTA notifications to the WTO and income inequality. However, overall trade openness is not found to affect income inequality. The income inequality effect differs between goods notification FTAs and services notification FTAs: the higher goods-related FTA notifications to the WTO bring a reduction in income inequality, while the higher service-related FTA notifications raise income inequality.