Globalization has undeniably transformed the world, lifting millions out of poverty and making goods more affordable for consumers in wealthy nations. But here’s the catch: it’s also fueled a simmering resentment about wages, job security, and fairness. Over the past three decades, advanced economies have witnessed factory closures, stagnant or declining wages in manufacturing, and the rise of political movements demanding protection from foreign competition. This isn’t just about economics; it’s about communities feeling left behind. Research by Ottaviano et al. (2021) highlights a striking trend: voters in regions hardest hit by import competition are increasingly turning to parties skeptical of globalization and multilateralism, while governments in these areas are embracing protectionist or nationalist policies.
Economists’ understanding of this phenomenon has evolved. Two decades ago, the prevailing view was that trade played a minor role in rising inequality. However, Krugman (2007) challenged this, arguing it was ‘no longer safe’ to downplay trade’s impact. He pointed to the visible effects of import competition from low-wage countries, particularly China, on income distribution within advanced economies. Since then, a wave of research has focused on the ‘China Shock,’ revealing how the surge in Chinese exports after the 1990s led to persistent job losses, lower wages, and slower economic recovery in heavily exposed U.S. manufacturing regions (Autor et al. 2013, Acemoglu et al. 2016, Pierce and Schott 2016). Interestingly, Goldberg and Pavcnik (2018) found that these negative wage effects aren’t limited to wealthy nations; developing economies are also feeling the heat.
But here’s where it gets controversial: The China Shock is just one piece of a larger puzzle—the global relocation of production and exports. In our recent study (Alcalá and Romeu 2025), we expand the analysis beyond China to examine how the broader shift of production to lower-income countries has impacted inequality worldwide. Using detailed trade data covering 5,000 products and 168 countries from 1996 to 2017, we investigate whether this global production shift has widened income gaps within countries.
To measure this, we created an index of exposure to the international relocation of production (IRP). This index tracks whether a country’s initial exports were later taken over by richer (‘IRP to the North’) or poorer (‘IRP to the South’) economies. Our approach builds on Autor et al.’s (2013) shift–share framework but adapts it to a multi-country context. We first calculate a relocation index for each product, indicating whether its production is moving to higher- or lower-income countries. Then, we aggregate these indices for each country based on its initial export structure, creating a country-specific ‘relocation shock.’ To isolate the causal effect of IRP on inequality, we employ instrumental-variable techniques and dynamic panel estimation, using the Gini coefficient from the World Inequality Database as our primary inequality measure. We focus on pre-tax data to capture market-driven changes before government interventions.
Our findings are striking: greater exposure to IRP to the South significantly increases within-country inequality. Economies initially specialized in products that later relocated to poorer countries tend to experience rising inequality. And this is the part most people miss: For major economies like the U.S., China, and Japan, IRP to the South explains 20-40% of the increase in inequality between 1996 and 2017. Even in countries like Germany and South Korea, it accounts for 10-20% of the rise. While IRP isn’t the sole driver—technology, domestic policies, and structural changes also play roles—it’s a major factor.
To dig deeper, we analyzed how IRP affects different income groups. Using decile-level data from the World Inequality Database, we found that exposure to IRP to the South disproportionately harms the lower-middle and middle classes (roughly the 10th to 70th percentiles), while benefiting the top 10%. This aligns with Milanovic’s (2016) concept of a ‘second Kuznets wave,’ where the middle class shrinks as top incomes soar. Our results suggest that IRP to the South is a key driver of this trend.
Here’s the million-dollar question: If globalization is to remain politically sustainable, how do we address its unequal impacts? Blanket protectionism isn’t the answer—it’s costly for consumers and businesses, and unlikely to restore lost jobs. Instead, we need targeted interventions. This includes active labor market policies like retraining and wage insurance, place-based investments in affected regions, and redistributive measures to counter rising top incomes. While these policies aren’t perfect, as Antràs et al. (2017) note, they’re essential to ensure the benefits of trade are shared more equitably.
What do you think? Is targeted intervention enough, or do we need a more radical approach to address inequality? Let us know in the comments!
