The theory of comparative advantage suggests that trade and globalization should be the natural state of the world. Everyone benefits with trade so it should always be undertaken, but there are other theories which get in the way of this free trade. In fact, free trade will always create winners and losers. The politics between winners and the losers is what constrains globalization. The winners have to be stronger or more powerful than the losers for the rules of the game to change.
The politics of trade are driven by two major theorems or effects in trade: the Hechscher-Ohlin (HO) theorem and the Stopler -Samuelson (SS) effect. HO states that countries will export goods that more intensely uses the abundant factor and import the goods that use the scarce factor abundantly. Hence, a country that has a lot of cheap labor will export those goods that use a lot of labor. SS states that if there is an increase in the price of a good, the factor most used to produce that good will see an increase in its return. Both these theorems lead to the most important conclusion that effects the politics of trade. There will be factor price equalization over time. Cheap labor will be bid up in the country that exports labor-intensive goods, but the price of labor will decline in the country that imports the labor intensive good. The same result will occur with capital. US workers will see lower real wages or lose their jobs if the imported goods can be made with cheaper labor abroad.
If you are a developed country that imports labor intensive good, domestic workers will see their real wages fall. Of course, the consumer will benefit from the cheaper goods, but the impact will be spread out over a broader base. In a slow growth environment, it is harder to push free trade policies. This issue is currently facing the US and many other developed countries and will become more important as get closer to elections. Currency and trade wars may be coming soon.
The politics of trade are driven by two major theorems or effects in trade: the Hechscher-Ohlin (HO) theorem and the Stopler -Samuelson (SS) effect. HO states that countries will export goods that more intensely uses the abundant factor and import the goods that use the scarce factor abundantly. Hence, a country that has a lot of cheap labor will export those goods that use a lot of labor. SS states that if there is an increase in the price of a good, the factor most used to produce that good will see an increase in its return. Both these theorems lead to the most important conclusion that effects the politics of trade. There will be factor price equalization over time. Cheap labor will be bid up in the country that exports labor-intensive goods, but the price of labor will decline in the country that imports the labor intensive good. The same result will occur with capital. US workers will see lower real wages or lose their jobs if the imported goods can be made with cheaper labor abroad.
If you are a developed country that imports labor intensive good, domestic workers will see their real wages fall. Of course, the consumer will benefit from the cheaper goods, but the impact will be spread out over a broader base. In a slow growth environment, it is harder to push free trade policies. This issue is currently facing the US and many other developed countries and will become more important as get closer to elections. Currency and trade wars may be coming soon.
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