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Without trade, the United States produces more high-tech goods and consumers pay a lower relative price for them than in China. But here is the important point: in the US, the wages of high-skilled workers are lower than in China. Not lower in absolute but in relative terms.
Great programmers in the US are handsomely rewarded because the country can export the goods and services they produce. If Apple, Uber or Facebook could sell and operate only in the US, the demand for high-skill workers would be much lower than it is today, and the country’s lower-skilled labor force would not face such strong competition from abroad.
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With trade, low-tech goods become relatively cheaper in the US. But, critically, people who work in low-tech industries there face the prospect of lower wages, even if the overall price of goods and services in the economy falls, because there is less demand for their jobs. Trade increases job growth in the US economy, but
in some industries there are job losses
Bertil Ohlin was Eli Heckscher’s student and collaborator. Wikimedia Commons
The argument is relatively easy to understand. Countries with a higher proportion of more educated workers have an advantage in producing more technologically advanced goods.
There’s plenty of other evidence that trade has an impact on income inequality.
Reviews from 1990
1995 describe the old evidence
on the relationship between trade and inequality; there’s a 2003 exploration of the
link between opening up to trade and inequality
in Argentina; and a
review of cross-country studies
with data from the 1990s and early 2000s.
a 2015 update of the H-O model
has extended the empirical evidence to show how trade increases the technology level in all partners and a
2012 paper has examined
urban wage distribution in China.
But all the empirical evidence on the importance of trade to income distribution
comes to fruition in a 2014 paper
that finds clear evidence that openness to trade increases wage inequality at lower levels of income (within the OECD). It also found there was no significant effect at higher levels of income.
The H-O model sharpens focus on the realities of our modern world. Inflation has been strikingly absent in the rich world during the 21st century due largely to the growth and efficiency of international trade. This has made products cheaper for the average American but, at the same time, globalisation has significantly spurred income inequality.
China exports low-tech goods… Aly Song/ Reuters
The model provides a direct link between the Chinese internal migrant working long hours in a Shenzhen factory and the Silicon Valley employee enjoying an elitist’s workday, replete with healthy snacks.
economists had mistakenly expected
Heckscher and Ohlin’s canon to become less relevant, but that’s changing.
Recent work from MIT has provided
the first and timely systematic evidence
that the inequality effects of the H-O framework are much more profound and longer lasting than previously thought.
The fact is that
too few people acquire better skills
as quickly as needed;
too few disenfranchised families relocate
to more promising regions;
and the combination
of decaying skills and lack of mobility generates a downward spiral of discontent.
But all is not lost.
Trade lifts all countries
and contributes to improvement in productivity and the range of products at our disposal, and engenders myriad innovations that make modern life easier. Increased trade has
even helped improve human rights
made companies more socially responsible
Affecting the wages of US workers in low-tech industries. Jim Young/ Reuters
And we have
known the optimal policy regarding trade agreements
for a long time but failed to implement it effectively. Free trade has a necessarily distributive effect. And the correct path is to have trade agreements with specific programs to diminish its negative impact on certain levels of income.
In NAFTA, for instance, the Transitional Adjustment Assistance (
) program had as its primary goal to assist workers who lost their jobs or whose hours of work and wages were reduced as a result of trade with – or a shift in production to – Canada or Mexico.
We should concentrate on designing programs complementary to trade agreements, such as the TAA, especially as we now know some of the distributive effects of free trade
don’t dissipate easily as previously thought
Ignoring Heckscher and Ohlin’s prescient wisdom has cost many people their livelihoods. The best path for society is to increase trade agreements but only if accompanied by fail-safes for the segments of society most likely to be adversely affected.
Policymakers and researchers forgot this for too long and we are now facing the backlash.
This article was first published on theconversation.com.