The effect of income inequality in the determination of free trade agreements

Abstract

This paper tests the relationship between income inequality and the possibility of free trade agreements (FTAs). The model is based upon Baier and Bergstrand (2004). Two new explanatory variables are added to their model. These variables measure income inequality and the level of democracy in country pairs. It is found that the potential welfare gains and likelihood of an FTA between a pair of countries is higher, the more (less) egalitarian the income distribution in the relatively capital (labor) abundant country of the pair is, if the country is democratic.