POL 4410 Week Six

The Domestic Impact of Trade

Structure

1.Theories of Impact of Trade

2.Impact in the USA

3.Thursday: Readings

Theories

1.Factor Based

2.Sector Based

3.Asset Based

4.Rent-Seeking

Factor-Based

•Stolper Samuelson / Hecksher-Ohlin

•Factors: labor, capital, land, human capital

•Abundance and scarcity of factors leads to different returns

•NB: Many other factors affect returns to factors

Rogowski’s Setup

High Land / Labor Ratio

Low Land / Labor Ratio

Advanced Economy

Land and Capital pro FTLabor anti FT

USA

Capital and Labor pro FT Land anti FTJapan 1960s

Backward Economy

Land pro FTCapital and

Labor anti FTBrazil

Labor pro FTCapital and Land anti FT

Vietnam

Sector Based

•Ricardo-Viner (RV)

•Concept of ‘Asset Specificity’

•Can you move sector?

•How are sectors affected by trade?

•Sheltered vs. Exposed Sectors

Asset Based

•Value of Assets is determined locally

•Local conditions determined by factor / sector composition

•Even if you do not earn income you are affected by trade

Rent-Based

•Politicians may use tariffs and duties to fund themselves or favored schemes

•Politicians may favor free trade if it increases income and hence rents

•Politicians may ‘sell protection’ to exposed sectors.

Impact on the USA

1.Labor, Capital, Land, Human Capital

2.Rising and Falling Sectors

3.Trade vs. Outsourcing

Labor•US labor has almost

always been scarce.

•Exception in 1950s / 60s?

• Labor is typically protectionist.

• In 19th C, vs immigration

• In late 20th C vs trade and outsourcing.

•Opposed NAFTA

Capital•US capital was

scarce in 19th C - tariffs

•US capital became abundant in 1920s.

•Leading advocate of free trade currently.

•NAFTA led to free investment

Land•Farmers were

most free trade group in 19th C

•Today they are highly protected through a series of subisidies

•Large farm / small farm split

•Also oil industry?

Human Capital•Originally

unimportant

•US one of first educated nations

•Now the key group of free-traders

•But what about outsourcing?

Rising Sectors

•Computing Services

•Biotech

•Oil

•GMO food

•Financial Services

Falling Sectors•Auto industry

•Small farms

•Steel

•Textiles

•Microchips and consumer electronics

•Programming?

Winning and Losing Regions

•Winners: Massachusetts, N. Virginia, N. California, Minnesota, N. Carolina, Texas

•Losers: Michigan, Ohio, Nebraska, West Virginia, Mississippi

Housing Bubble in USA

Outsourcing (1)•In trade economics,

trade, migration, and the supply chain are equivalents.

•Theory of supply chain - next week

•MNCs produce goods with several components. Each component is produced where comparative advantage is highest

Outsourcing (2)•Offshoring of production requires

1) Disaggregated Supply Chain2) Ability to transfer tasks abroad

•Digitization affects ease of transfer

• India developing comparative advantage in human capital services.

•China’s comparative advantage is in labor, but maybe soon in human capital and capital

Outsourcing’s Impact

Jobs Lost to Date

Projected Job Loss

Jobs at Risk

300,000-995,000

3.3 million-6 million

14.1 million

Other flows

•In terms of wages and prices...

•Migration is equivalent to trade in labor-intensive goods

•Capital flows are equivalent to trade in capital-intensive goods

•But what about land, oil, human capital?

Rogowski

•Argument centers on effect of trade on factors (H-O / S-S)

•Land / labor ratio + capital abundance

•Four historical periods: 16th century; 19th century; Interwar years; Bretton Woods era

Rogowski (2)

Rogowski (3)

Rogowski (4)

Wood•Economists agree that trade hurts

somewhat - but how much?

•Wood claims high levels of decline from H-O / S-S effects

•And also... defensive technology production to avoid labor.

•Takes little for impact of trade to hit sheltered sectors.

Wood (2)

Wood (3)

Wood (4)

Scheve and Slaughter

•Test whether HO or RV is true on national survey evidence.

•Find that skilled workers favor trade - supports HO

•Also: house ownership is important determinant of preferences on trade.

Scheve and Slaughter (2)

Scheve and Slaughter (3)

H-OR-V

RegionAsset

Hiscox•Sometimes H-O. Sometimes R-V

•How do we know when?

•H-O during times of inter-industry mobility

•R-V during inter-industry immobility

•Look at splits in parties, unions, lobbyists

Hiscox (2)

Hiscox (3)

Hiscox (4)