TRADE FLOWS AND INCOME DISTRIBUTION: A Survey of Theoretical and Empirical Findings

Abstract

ABSTRACT This study reviewed theoretical and empirical studies that connect trade flows and trade policies to income distribution/inequality, driven by data uncertainty, and inconclusive, mixed empirical and theoretical proof. The paper may also help to clarify the winners and losers of the African Continental Free Trade Area Treaty that was recently signed. The paper deployed a systematic analysis of the relative strengths and shortcomings of existing literature on the subject matter, concentrating on economic journal articles. The paper found that trade flows and trade policies have a major effect on the distribution of income and on inequality across countries. In addition, the study found that winners and losers also exist from every other trade policy; however, depending on the use of available labour and economic growth performance, there could be an increase or decrease in income distribution/inequality. Economic growth, for instance, offers a channel through which free trade decreases inequality by increasing both initial income and subsequent growth. It also appears that trade flows rely on the level of human capital endowments, as relatively well-educated countries appear to have higher trade export shares and lower income inequality than countries with poor primary export shares. The study therefore proposed the formulation of effective complementary domestic policies aimed at expanding basic education to have the requisite inequality-reducing effects, and economic diversification away from primary exports with high market volatility. Finally, when linking trade flows to income