Timing of trade liberalization

This paper studies the effects of trade liberalization on growth and longrun global income inequality using a two-country model of human capital accumulation by credit-constrained households. I show that the timing of trade liberalization is a crucial determinant of its e. effects on growth. Moreover, I show that the size of the longrun income gap between the two countries depends on the di. erence in domestic income inequality when they open up to trade. Based on these results, I analyze the e. effects of redistributive policy within a country. I show that redistribution in one country may increase income per capita of its trading partner if it is undertaken in a steady state, while the opposite is true if the policy is undertaken during transition.