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 adopt 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. At the same time, we do not find any
statistical evidence that more trade increases aggregate measures of income inequality.
Heeding previous concerns in the literature (e.g. Rodriguez and Rodrik, 2001; Rodrik,
Subramanian and Trebbi, 2004), 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.