We revisit the relationship between international trade, economic growth and inequality with a focus on Latin America and the Caribbean. The paper combines two approaches: First, we employ a crosscountry panel framework to analyze the macroeconomic effects of international trade on economic growth and inequality considering the strength of trade connections as well as characteristics of countries' export markets and products. Second, we consider event studies of past episodes of trade liberalization to extract general lessons on the impact of trade liberalization on economic growth and its structure and inequality. Both approaches consistently point to two broad messages: First, trade openness and connectivity to the center of the trade network has substantial macroeconomic benefits. Second, we do not find a statistically significant or economically sizable direct impact of trade on overall income inequality.

In the cross‐section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We revisit the Frankel and Romer (1999) identification strategy, and exploit countries’ exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross‐country estimates for trade’s impact on real income are consistently positive and significant over time. In addition, we do not find any statistical evidence that more trade increases aggregate measures of income inequality in the long run. A decile‐level decomposition reveals that the positive effect of trade on income decreases monotonically along the income distribution, suggesting that trade integration should be an integral part of long‐run development agendas under any reasonable social welfare function. Addressing previous concerns in the literature, we carefully analyze the validity of our geography‐based instrument, and confirm that the IV estimates for the impact of trade are not driven by other direct or indirect effects of geography through non‐trade channels.

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The paper applies a network analysis framework to analyze the regional and global integration of Latin American and Caribbean (LAC) countries. We compare network-based measures of trade integration to conventional measures, decomposing integration along several dimensions to better understand the sources of trade connectivity and their impact on growth. The paper finds that LAC countries are relatively well integrated in terms of links to diversified markets, but the strength of those links is weak. Comparing trade integration to predictions from gravity models, we find many LAC countries have significant scope to improve connectivity and increase their roles in regional and world trade networks.

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