Revisiting the Stolper-Samuelson Effect: The Impact of Trade Liberalization on Income Inequality - Evidence from Taiwan

Abstract: Does trade liberalization affect income distribution? Existing literature reveals divergent empirical results, both supporting and contradicting the Stolper-Samuelson theorem (Stolper and Samuelson, 1941). We contend that improper handling of trade liberalization indicators has led to these varied outcomes. Our study focuses on Taiwan, examining the period from 1976 to 2016, and employs a nuanced approach by disaggregating import and export values into labor-intensive agriculture industries and capital-intensive industrial sectors. To avoid measurement inaccuracies, we recalibrate trade liberalization indicators tailored to each sector. The Gini coefficient serves as the dependent variable to measure income inequality, while foreign direct investment inflows and economic growth rate act as control variables representing financial liberalization and economic growth, respectively. The Autoregressive Distributed Lag Bounds Test (ARDL) is used to reassess the validity of the Stolper-Samuelson theorem. Our empirical results indicate a significant long-term negative relationship between the agricultural export ratio and income inequality, while the industrial import ratio demonstrates a significant long-term positive relationship with income distribution, supporting the Stolper-Samuelson theorem. Given the adverse effects of the transition from agriculture to industry on income distribution, it is imperative for governments to pursue comprehensive and balanced approaches, employing diverse policy instruments, to reduce wealth disparities and alleviate social inequality. Keywords: ARDL Bounds Test, Income Inequality, Stolper-Samuelson Theorem; Trade Liberalization JEL Classification Number: F14, F63, O15