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Distributive Effects of Regional Trade Agreements on the ‘Small Trading Partners’: Mercosur and the Case of Uruguay and Paraguay

Abstract It is disputed whether trade liberalisation processes are sufficient for reducing poverty and inequality. We explore how ‘gains from trade’ have been distributed in the two minor trade partners of Mercosur, Uruguay and Paraguay, by analysing the impact of trade liberalisation on poverty and inequality through two main transmission channels: prices and income. In the case of Uruguay, trade liberalisation favoured a reduction in poverty indicators but had an almost zero effect on income inequality. In the case of Paraguay, trade liberalisation had a markedly negative impact in terms of poverty yet income distribution improved. We conclude that in the case of Mercosur, the effect of trade on poverty and income inequality varies per country and per region. In particular, we conclude that trade integration policies cannot be regarded as ‘poverty-alleviating’ per se.