The global shift in production and its impact on inequality: A comprehensive analysis
The rise of globalization has brought about significant changes in the global economy, impacting both the rich and the poor. While it has lifted millions out of poverty and made goods more affordable, it has also sparked anxiety about wages, job security, and fairness. In recent decades, advanced economies have witnessed factory closures, declining wages in manufacturing, and the emergence of political movements advocating for protection against foreign competition. This trend has led to a shift in voter preferences, with those in regions heavily exposed to import competition increasingly supporting parties skeptical of openness and multilateralism. Governments in these regions have responded by embracing protectionist or nationalist industrial policies (Ottaviano et al., 2021).
Economists' understanding of these phenomena has evolved over time. Twenty years ago, the prevailing view in wealthy nations was that trade played a minor role in rising inequality. However, Krugman (2007) challenged this notion, arguing that downplaying trade was no longer safe. He highlighted the significant impact of import competition from low-wage countries, particularly China, on the distribution of income within advanced economies. Since then, extensive research has focused on the 'China Shock', demonstrating that the surge in Chinese exports post-1990s led to persistent job losses, lower wages, and slower recovery in local manufacturing labor markets in the US and other countries (Autor et al., 2013; Acemoglu et al., 2016; Pierce and Schott, 2016). Moreover, further studies have revealed that the negative wage effects of intensified international competition are not confined to advanced economies but also affect developing nations (Goldberg and Pavcnik, 2018).
The China Shock, however, is just one aspect of a broader phenomenon: the sustained expansion of exports from various developing economies over the past few decades. In our recent research (Alcalá and Romeu, 2025), we explore the broader implications of this process, examining the international relocation of production and exports (IRP) across multiple countries. We utilize detailed trade data covering approximately 5,000 products and a comprehensive panel of 168 exporting and importing countries from 1996 to 2017.
Analyzing the impact of IRP on inequality
To assess the distributional consequences, we developed an IRP exposure index. This index measures the extent to which a country's initial exports are subsequently exported by richer or poorer economies. Our empirical approach mirrors the shift-share framework used by Autor et al. (2013), who analyzed local labor market outcomes in the US by regressing them on a weighted average of Chinese import shocks. We adapted this method to a multi-origin, multi-destination context in two steps. First, we calculated a relocation index for each product, indicating whether its exports were moving towards higher-income or lower-income producers over time. Second, we aggregated these product-level indices using the country's initial export structure as weights, resulting in a country-specific measure of IRP exposure, known as the relocation shock. To determine the causal effect of IRP exposure on inequality, we employed an instrumental-variable strategy and dynamic-panel estimation techniques. Our primary measure of inequality was the Gini coefficient from the World Inequality Database (https://wid.world/data/). We used pre-tax data to capture market-driven distributional changes before the influence of fiscal systems and policies.
Our findings revealed that greater exposure to IRP in poorer economies led to statistically and economically significant increases in within-country inequality. Economies that initially specialized in products whose global exports later relocated to poorer nations experienced rising inequality. This effect is substantial, as illustrated in Figure 1, which shows the estimated impact of IRP on the Gini index for countries with a GDP above US$400 billion (2017 purchasing power parity). The estimated effect of IRP on the Gini index was 1.13, 1.90, and 1.29 percentage points for the US, China, and Japan, respectively. Considering the observed increase in Gini over 1996-2017 in these countries (4.78, 8.09, and 3.49 points), IRP exposure 'to the South' can account for approximately 20-40% of the rise in inequality.
Understanding the winners and losers
Using decile-level income data from the World Inequality Database, we further analyzed how IRP exposure affects income shares across different deciles within a country. This approach, as shown in Figure 3, revealed a redistribution of income. The income shares of the lower-middle and middle groups (approximately the 10th to 70th percentiles) tend to decrease with exposure to IRP in poorer economies. Conversely, the income share of the top decile increases with IRP exposure in these regions. These findings align with Milanovic's (2016) 'second Kuznets wave' theory, where the national middle class is squeezed, and top income shares rise. Our research identifies IRP exposure as a significant factor contributing to the hollowing out of the middle and the increase in top income shares.
Policy implications and conclusions
The negative shocks from international production relocation disproportionately affect specific regions, sectors, and groups of workers, and these impacts are not automatically offset by new opportunities elsewhere in the economy. The inequality costs associated with IRP have fueled a strong political backlash and renewed protectionist pressures. If the primary distributive pressures stem from exposure to specific relocation shocks rather than trade intensity, targeted interventions are more appropriate than blanket protectionism. General protectionist measures are costly for consumers and downstream firms and may not lead to a durable recovery of affected jobs. Efficiency and fairness require more precise adjustment policies, including active labor market policies (retraining, wage insurance, mobility support) and place-based industrial and infrastructure investments in regions most exposed to relocation shocks. Additionally, redistributive tools are needed to counteract the upward shift in income shares towards the top. While these interventions may have distortionary effects, as suggested by Antràs et al. (2017), ensuring the political sustainability of globalization requires pairing trade gains with credible support for those bearing its concentrated adjustment costs.
