Political Economy of International Trade

International trade has a multidimensional influence on the economy, since it determines to a great extent the production and distribution of products and the structure of the labour market in the trading countries. Countries with greater trade engagement tend to show higher rates of economic growth and lower levels of inequality. However, it is very difficult to attribute much of the growth to trade openness. Despite the fact that international literature has emphasised the causal relationship of trade openness with economic growth and economic inequality, the examination of this relationship leads us to mixed and not robust results, with most of the studies having varying outcomes. This paper attempts a thorough review of the related literature, in order to elaborate the most catalytic theories of trade and growth and establish the necessary theoretical background. Moreover, the causal relationship between the above variables is analysed, and the crucial evidence of the modern empirical researches is highlighted. The paper concludes that trade openness and economic growth are interconnected. Nevertheless, this correlation depends on many macroeconomic variables, and it is not a standardised process that all countries could follow with the same effectiveness. Trade liberalisation has contributed to the reduction of income inequality among countries, although in some cases it was observed a considerable increase in within-country income inequality.