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 FT Labor anti FT USA Capital and Labor pro FT Land anti FT Japan 1960s Backward Economy Land pro FT Capital and Labor anti FT Brazil Labor pro FT Capital 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 Chain 2) 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, , 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-O R-V Region Asset

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)