Do Trade Agreements Lead to Income Inequalities? In the 1990s, when trade relations began to flourish in the United States, income inequality increased considerably. This increase was widespread, affecting all parts of the income distribution. According to the U.S. Census Bureau, real income increased more than twice as fast for the top 20 percent of households. Middle-income groups saw real income growth twice as fast as the bottom 60 percent. The gap has widened even further since 1994.
The increase in trade in the developed world has been credited by many scholars as a factor behind rising income inequality. But recent studies have found that while trade is a major factor contributing to income disparities, it also causes income disparities. In many countries, trade with developing countries has exacerbated income inequalities. One such country, Uzbekistan, is a case where trade has worsened income inequality, while in Benin, liberalisation improves social welfare.
Almost half of Americans believe that trade agreements increase income inequality, while just 17% think that trade agreements create more jobs. In contrast, five years ago, the number of Americans saying free trade agreements caused job losses increased to 55%, while only 8% said it did not make a difference. The opposite is true today, however: more than half of Americans believe that trade agreements benefit people in developing countries. Nearly six out of 10 say free trade agreements increase income inequality while only one-fifth believe that they raise wages.
Regional inequality is another factor that is affected by trade. Trade agreements that increase trade are likely to negatively affect firms in regions with high concentrations of import-competing industries. Furthermore, these negative shocks may take longer to adjust, and localities may be slow to recover. This can lead to negative spillover effects. When trade agreements are implemented, these spillover effects may lead to a deepening of regional inequality.
Though most Americans think free trade agreements are good for the United States, their views are affected by the degree of income inequality in their households. While nearly half of Americans with an income of $100,000 or higher think that free trade agreements helped their family’s finances, only a third say they hurt it. These results are especially significant for people with lower incomes. So the question remains: Do Trade Agreements Lead to Income Inequality?
One way to test this argument is to examine the growth of wages for unskilled workers in industries that produce traded goods. If trade were the sole culprit, firms should be hiring more unskilled workers in these industries. If trade does not increase wages in such industries, it must be caused by something other than trade. It is hard to say. However, there are many factors that make trade agreements worse for wages.