Lecture 3 Flashcards
2 frameworks of distributional consequences
WTO already criticized by environmentalists and
consumer groups for its rules, but RTAs often go much
further
Heckscher-Ohlin
A country will export goods that make intensive use of the resources the country has in abundance
* A country will import goods that make intensive use of the resources in which the country is scarce
* Industrial countries are rich in capital & skilled labor
They export goods that are capital intensive and require skill
* Developing countries
Are rich in land, raw materials or unskilled labor
They export agriculture, minerals and textiles
Stolper-Samuelson Theorem
Trade benefits owners of factors of production used to produce exported goods
Usually the abundant factor (Heckscher-Ohlin)
Artificially restricting trade hurts owners of abundant factors
Trade hurts owners of factors of production used to produce imported goods
Usually the scarce factor
Artificially restricting trade raises the income of owners of scarce factors
Factor mobility Stolper-Samuelson
- Factor mobility:
The ease with which factors can move from one industry to another - The factor model assumes that capital and labor are perfectly mobile.
Investment in Volkswagen is the same as investment in Apple computers. True?
An autoworker can easily transition to work on a farm. True? - Factors might be industry specific!
Immobile
Ricardo-Viner approach
- Instead of “owners of factors of production”, Ricardo-Viner considers the industry or sector of the economy
that employs an individual. - We usually consider two types of industries:
Import-competing
Export-oriented - These types are still determined by factor endowments and relative factor intensity
Capital-intensive sectors in capital-abundant countries will be export oriented (think German cars)
Labor-intensive sectors in labor-scarce countries will be import oriented (think German apparel sector)
Quick note factor mobility
- Both Ricardo-Viner and Stolper-Samuelson assume that factors are immobile
across borders - Of course, capital can be mobile through international investment…
- … and labor can be mobile through migration
New trade theory
Paul Krugman got a “Nobel” prize in Economics for this
Observation: lots of trade between similar countries
Idea: Increasing returns to scale – countries that are identical still have an incentive to trade with each other
Industries in each country specialize in a niche product and export it to the world
Political implications: Sometimes used to justify infant industry industrialization
New new trade theory
Also called the Melitz Model, Melitz still waiting for his Nobel Prize
Observation: even within exporting sectors, only a small fraction of firms export
Idea: Within one sector, only the most efficient firms export
Political implications: Only the most efficient firms will lobby in favor of free trade
do public preferences align with frameworks? Stolper samuelson prediction
Stolper-Samuelson would predict that:
People with “abundant” factor should support free trade
People with “scarce” factor should oppose free trade
Critique on research 2
Individuals don’t know much about trade or how it affects them (Guisinger 2017; Rho and Tomz 2017)
* Preferences are not purely individualistic or economic:
National Security Concerns: Citizens support trade agreements with friends’ not rivals’ (DiGiuseppe and
Kleinberg 2018)
Socio-tropic preferences: People don’t think of themselves but think about what’s good for the country
(Mansfield & Mutz 2009)
Take away
- Just because public opinion doesn’t always align with either
Stolper-Samuelson or Ricardo-Viner doesn’t mean they are not
useful models. - If individuals do not recognize their interests, they may still vote
based on their economic well-being, and their political
representatives might legislate based on fear of economic
changes.
Heckscher-Ohlin predictions about firm interests
- Heckscher-Ohlin: Firms = Capital
In capital-abundant countries, all capital-owners should favour free trade
In capital-scarce countries, all capital-owners should oppose free trade
Ricardo-Viner predictions about firm interests
Exporting sectors favour free trade
In capital-abundant countries, these are capital-intense sectors (e.g. autos)
In capital-scarce countries, these are less capital-intense sectors (e.g. textiles)
Import-competing sectors oppose free trade
In capital-abundant countries, these are less capital-intense sectors (e.g. textiles)
In capital-scarce countries, these are capital-intense sectors (e.g. autos)
New-new trade theory predictions about firm interests
In every sector, the biggest most productive firms favor free trade, and the rest don’t
Public preferences and frameworks, ricardo viner prediction
- Ricardo-Viner would predict that:
People employed in exporting sectors should support free trade
People employed in importing sectors should oppose free trade
What does the empirical evidence say?
