Globalization, Trade, and Inequality: Evidence from a New Database

Analyzing and simulating trade policy scenarios in a complex and intertwined global economy requires a database with a complete bilateral trade matrix at the level of highly disaggregated industries over several decades. Such a database has not been created until now. This paper introduces the International Trade and Production Database for Simulation (ITPD-S). In combination with the International Trade and Production Database for Estimation (ITPD-E), we use it to quantify the impact of globalization on bilateral trade, real income, and inequality in the world at the detailed industry level in 1990-2019. To perform the analysis, we rely on a new quantitative trade model that enables us to estimate the magnitude of globalization and then perform a counterfactual analysis of the impact of globalization on real output within the same framework. Our estimates reveal that, on average, bilateral globalization forces have led to a remarkable increase in international trade of about 570%, between 1990 and 2019, with very wide but intuitive variation across industries. Our counterfactual analysis reveals that globalization has benefited most countries but relatively more so smaller and more open economies, which are typically developing countries. As a result, this ‘catch-up’ implies less cross-country income inequality.