INCOME INEQUALITY AND CHOICE OF FREE-TRADE IN A MODEL OF INTRAINDUSTRY TRADE

This paper explains why developed countries impose more trade barriers on middle-income countries than on either poor or other developed cou ntries. We use a median voter model of the choice between trade and au tarky embedded within an intraindustry trade model similar to Krugman. Our main result is the derivation of conditions under which a rich co untry rejects trade with middle-income countries, but accepts trade wi th either similar or poor countries. We also show that if increased in equality lowers median wealth in the developed country, the range of c ountries for which free trade is rejected is enlarged.