Trade-in-task and regional income inequalities

Abstract

Adjustment mechanisms that restore equilibrium in international trade do not work at subnational level. For this reason, regions do not compete on the basis of comparative advantages. In this paper such a conceptual perspective is inserted in the Grossman and Rossi-Hansberg model (2008) to highlight the heterogeneous income distribution of the effects of trade-in-task among regions within a country. Conceptually extended also to receiving countries, the theoretical model is empirically verified for both offshoring and receiving European economies. Our results show that in offshoring countries increasing trade-in-task triggers intra-country regional income inequalities, thus promoting regional income divergence. Such result suggests the importance of redistributive regional policies. The opposite holds for receiving countries, where further trade integration is likely to boost processes of intra-country regional income convergence, suggesting that no normative actions mitigating inequality increases are required.