Asymmetric Trade Costs, Trade Imbalances, and the World Income Distribution

Earlier work by Waugh (2010) suggests that asymmetric market access costs across exporting countries are a major reason for differences in real per-capita income around the globe: 25% − 50% (depending on the measure) of world income inequality could be explained by cross-country trade cost asymmetries alone. We show that these results were driven by what we call model under-specification, an ill-suited model calibration which fails to match data on per-capita incomes well enough, and a counterfactual experiment inconsistent with the theoretical model and the idea of a reduction in country-specific market access cost asymmetries as such. We use the same (Eaton-Kortum-type) structural model and data, estimate all model parameters while respecting general equilibrium constraints, and calibrate it to the data. The obtained results suggest a largely different picture: the complete abolition of exporter-specific trade cost asymmetries leads to no more than a 1.5% − 6% reduction in the income inequality around the globe. Moreover, in the presence of large trade imbalances, a reduction in such trade cost asymmetries may even have a detrimental effect on income equalization between poor and rich countries.