Redistributive Capacity and International Trade: A Cross-Country Analysis

ABSTRACT

Existing studies have shown that the deterioration of domestic income distribution is an important cause for the decline in international trade. This paper investigates whether alleviating domestic income inequality could promote international trade. From the redistribution perspective, this study examines the relationship between state redistributive capacity and international trade by using unbalanced panel data of 153 countries from 1960 to 2018. According to our empirical findings, strengthening redistributive capacity promotes international trade by enhancing domestic society's perception of free trade. In addition, this promoting effect is independent of trade mode but varies with trade content, trade period, and trade subjects.

KEYWORDS:

• Redistributive capacity
• international trade
• income inequality
• economic globalisation
• public attitude

JEL:

• F14
• F41
• F62

Acknowledgements

The authors acknowledge the valuable comments from the two anonymous journal reviewers and Yuxi Ding (Head of International Affairs, Center for Finance EMBA at Tsinghua University PBC School of Finance) for her suggestions on this article.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 For the sake of simplicity, this study refers to this view as ‘the international trade-income distribution backlash theory’.

2 Data source: https://kof.ethz.ch/en/forecasts-and-indicators/indicators/kof-globalization-index.html.

3 Based on comparisons with other data for income inequality measures, Bergha and Nilsson (2010) also find that SWIID data are more complete, valid, and robust.

4 Mathematically, $redist\mathrm{\_}ratio={\displaystyle \frac{gini\mathrm{\_}pre-gini\mathrm{\_}post}{gini\mathrm{\_}pre}\times 100\text{\%}}$.

5 Acemoglu (2005) holds a view, arguing that a strong state capacity implies too much taxation, which tends to discourage investors, while a weak state capacity implies that the expected returns to the ruler from economic development are too low, thus lacking incentives for the supply of social public goods, both of which distort economic activities. Therefore, the most desirable state capacity should not be too high or too low but be controlled at an intermediate level.

6 According to Savina et al. (2019), de facto trade globalization refers to the exchange of goods and services over long distances. This is measured using the variables exports and imports of goods and exports and imports of services, both measured as a share of GDP. To account for the geographical distribution of trade linkages, It includes a variable which is computed as the inverse of the average over the Herfindahl-Hirschmann trade partner concentration index for exports and imports of goods that measures trade partner diversity. De jure trade globalization refers to policies that facilitate and promote trade flows between countries. It is measured using variables on trade regulation, trade taxes, tariff rates and free trade agreements.

7 Based on the method for calculating the magnitude of the mediating effect, the magnitudeof developed countries = (0.043 × 0.471)/0.037 = 0.547; the average magnitude of all countries = (0.045 × 0.285)/0.038 = 0.338.

Additional information

Funding

Xie would like to acknowledge the support from the Special Task Project of Humanities and Social Sciences Research of the Ministry of Education of China [grant number 22JD710023]. Yang would like to acknowledge the support from the General Project of the National Social Science Foundation of China [grant number 21BZZ042]. Cheng would like to acknowledge the support from the Tsinghua University Xi Jinping Institute of Socialism with Chinese Characteristics for a New Era Youth Project [grant number QHXYY202105].