Trade Ties and Economic Divides: Trade and Income Inequality in the Regions of Europe

ABSTRACT This paper analyses how trade influences intra‐regional income inequality across Europe's NUTS‐2 regions. Drawing on newly compiled datasets capturing both inter‐regional trade and local‐level inequality for all EU member states plus the UK, we employ an econometric framework—complete with Instrumental Variable estimations and robust sensitivity analyses—to gauge the impact of trade on regional interpersonal inequality. In addition to examining aggregate trade, we distinguish between various trade channels, including exchanges within the EU versus those with the rest of the world, links to neighbouring regions versus non‐neighbours and domestic versus international flows. Our findings reveal that higher levels of trade are positively associated with changes in regional income inequality, as measured by the Gini coefficient. Crucially, this link depends on trading partners: trade within a single country, within the EU and with non‐neighbouring regions correlates with rising inequality, whereas international trade, trade with non‐EU partners or trade with neighbouring regions shows no statistically significant effect. These conclusions withstand a battery of robustness checks, including new control variables and a population‐weighted approach, further underscoring the role that particular types of trade play in shaping regional income disparities.