Chapter 5: Who Gains and Who Loses from Trade?. Short-Run Effects of Opening Trade In the short run,...

Chapter 5:Who Gains and Who Loses from Trade?

© 2016 McGraw-Hill Education. All Rights Reserved. 2

Short-Run Effects of Opening Trade

• In the short run, with factors of production tied to their current lines of production, gains and losses are divided by output sector. All factors tied to rising sector gain, and all factors tied to declining sector lose.

• In the U.S., owners of land and labor in wheat sector are expected to gain, and owners of land and labor in cloth sector are expected to lose.


The Long-Run Factor-Price Response

• In the long run, factors can move between sectors in response to differences in returns.

• In the long run, wage rates end up lower for all U.S. workers and higher for all foreign workers (each relative to its level with no trade). All land rents end up higher in the U.S. and lower in the ROW (each relative to its level with no trade). Why?


How Free Trade Affects Income Distribution in the Long Run


Winners and Losers: Short Versus Long Run


Three Implications of the Heckscher-Ohlin Model

• The Stolper-Samuelson theorem• The specialized-factor pattern• The factor-price equalization theorem


The Stolper-Samuelson Theorem

The Stolper-Samuelson Theorem states that, given certain conditions and assumptions, including full adjustment to a new long-run equilibrium, an event that changes relative product prices in a country unambiguously has two effects:• It raises the real return to the factor used

intensively in the rising-price industry.• It lowers the real return to the factor used

intensively in the falling-price industry.


A Factor Ratio ParadoxThe effects of trade on factor use have their paradoxical side. • The same fixed amounts of factor supplies get

reemployed in the long run. • But everything else about factor use changes.


Factor Use in Wheat and Cloth


The Specialized-Factor Pattern • The more a factor is specialized and

concentrated in the production of a product whose relative price is rising, the more this factor stands to gain

• The more a factor is specialized and concentrated in the production of a product whose relative price is falling, the more it stands to lose from the change in product price.


The Factor-Price Equalization Theorem This theorem states that, given certain conditions and assumptions, free trade equalizes not only product prices but also the prices of individual factors between the two countries.

To see what this means, consider our standard example of free trade in cloth and wheat. The theorem predicts that, even if factors cannot migrate between countries directly, with free trade • Laborers (of the same skill level) earn the same wage rate in both countries. • Units of land (of comparable quality) earn the same rental return in both countries.


The Factor-Price Equalization Theorem

The factor-price equalization theorem implies that laborers will end up earning the same wage rate in all countries, even if labor migration between countries is not allowed. Trade makes this possible, within the assumptions of the model, because the factors that cannot migrate between countries end up being implicitly shipped between countries in commodity form.


Does Heckscher-Ohlin Explain Actual Trade Patterns?

The Heckscher–Ohlin approach to trade provides important insights, in theory, about the gains from trade, the effects of trade on production and consumption, and the effects of trade on the incomes of production factors. These insights are based on the hunch by Heckscher and Ohlin about the basis for trade—why countries export some products and import others.



• The first formal efforts to test the H–O theory used the simple model of two factors of production and U.S. trade data. These tests failed to confirm the H–O theory.

• More recent tests recognize that more than two types of production factors are relevant to the H–O explanation of trade patterns.



Economists have tested the H–O theory in several ways. Complete tests require information on:• the factor endowments of different countries• international trade for various products• the factor proportions used in producing these

products.


Shares of the World’s Factor Endowments, 2010-2011

Physical Capital

Highly Skilled Labor

Medium-Skilled Labor

Unskilled Labor

CropLand

Pasture Land Forestland

United States 16.8 19.0 3.9 0.2 11.1 8.1 7.9

Canada 1.4 1.5 0.6 0.1 3.3 0.5 8.1

Japan 7.5 6.1 2.2 0.4 0.3 0.0 0.7

Germany 4.2 1.9 1.8 0.4 0.8 0.2 0.3

France 3.6 1.5 1.2 0.5 1.3 0.3 0.4

United Kingdom 2.6 1.7 1.2 0.4 0.4 0.4 0.1Other industrialized

Countries 16.8 9.5 5.9 1.6 6.6

13.1 7.0

China 18.3 12.9 27.8 15.7 8.6 12.8 5.5Other developing

countries 28.9 45.9 55.4 80.8 67.5 64.7 70.1


U.S. International Trade in Selected Products 2012

U.S. Export ($billions) U.S. Imports ($billions)

Net Exports as a % of Total Trade

Wheat (041) 8.17 0.85 81

Corn (044) 9.71 1.02 81

Coffee (071) 1.28 7.26 -70

Soybeans (2222) 24.74 0.35 97

Coal (321) 14.88 0.93 88

Crude petroleum (333) 2.4 321.86 -99

Primary plastic material(57) 34.49 13.8 43

Insecticides and herbicides (591)

3.31 0.89 58

Aircraft (792) 104.2 24.31 62

Clothing and accessories (84)5.58 87.96 -88

Shoes and footwear (85) 1.33 24.86 -90

Toys (8942) 0.96 11.55 -85

Products Whose Trade is Consistent with H-O Theory


U.S. International Trade in Selected Products 2012

U.S Exports ($billions) U.S. Imports ($billions)

Net Exports as a % of Total Trade

Pharmaceuticals (54)

44.59 68.66 -21

Perfumes and cosmetics (553)

8.21 7.05 8

Iron and steel (67)20.82 44.96 -37

Automobiles (7812)53.9 149.14 -47

Medical instruments (872)

21.46 16.2 14

Products Whose Trade Appears to Be Inconsistent with H-O Theory


What Are the Export-Oriented and Import-Competing Factors?

The U.S. Pattern


What are the Export-Oriented and Import-Oriented Factors?

The Canadian Pattern


Do Factor Prices Equalize Internationally?

• Factor prices clearly are not fully equalized across countries.

• The factor price equalization theorem is based on a number of assumptions, and some of these do not hold in the real world.

• A weaker form of the theorem works better: International trade tends to make the prices of factor more similar across countries.

• For example, the rapid increase in real wages for factory workers in China.


China’s Exports and Imports

One of the most striking features of the global economy is the rise of China as a trading force after it opened to international trade beginning in the 1970s. China accounted for less than 1 percent of international trade in 1980. Its exports and imports have grown rapidly, so that by 2012 China’s trade was about 9 percent of world trade.


China’s Exports and Imports • First, its trade has been roughly balanced—the

value of exports has roughly equaled the value of imports, even though both are growing rapidly.

• Second, much of its pattern of net exports and net imports of different products is just what Heckscher and Ohlin would predict.


China: Value of Exports and Value of Imports, 1976-2012


China’s International Trade, 2012

China's Exports ($billions) China's Imports ($billions)Soybeans (2222) 0.3 35Metal ores (28) 0.5 158.7Crude petroleum (333) 2.2 220.8Metalworking machinery (73) 6.9 18.2Computers (752) 169.4 35.1Audio equipment (763) 20 10.1Electronic microcircuits (7764) 54.3 192.7Aircraft (792) 1.6 17.6Clothing and accessories (84) 159.6 4.5Shoes and other footwear (85) 46.8 1.8Toys (8942) 11.5 0.3Vegetables (054 and 056) 10.6 2.7

Textiles and leather machinery (724) 4.7 4.6

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Chapter 5: Who Gains and Who Loses from Trade?. Short-Run Effects of Opening Trade In the short run,...

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