1. Chapter 5: Who Gains and Who Loses from Trade?

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

3. 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? © 2016 McGraw-Hill Education. All Rights Reserved. 3

4. How Free Trade Affects Income Distribution in the Long Run © 2016 McGraw-Hill Education. All Rights Reserved. 4

5. Winners and Losers: Short Versus Long Run © 2016 McGraw-Hill Education. All Rights Reserved. 5

6. Three Implications of the Heckscher-Ohlin Model The Stolper-Samuelson theorem The specialized-factor pattern The factor-price equalization theorem © 2016 McGraw-Hill Education. All Rights Reserved. 6

7. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 7

8. A Factor Ratio Paradox The 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. © 2016 McGraw-Hill Education. All Rights Reserved. 8

9. Factor Use in Wheat and Cloth © 2016 McGraw-Hill Education. All Rights Reserved. 9

10. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 10

11. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 11

12. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 12

13. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 13

14. Does Heckscher-Ohlin Explain Actual Trade Patterns? 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. © 2016 McGraw-Hill Education. All Rights Reserved. 14

15. Does Heckscher-Ohlin Explain Actual 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. © 2016 McGraw-Hill Education. All Rights Reserved. 15

16. Shares of the World’s Factor Endowments, 2010-2011 Physical Capital Highly Skilled Labor Medium- Skilled Labor Unskilled Labor Crop Land Pasture LandForestland United States 16.819.03.90.211.1 8.1 7.9 Canada 1.41.50.60.13.3 0.5 8.1 Japan 7.56.12.20.40.3 0.0 0.7 Germany 4.21.91.80.40.8 0.2 0.3 France 3.61.51.20.51.3 0.3 0.4 United Kingdom 2.61.71.20.4 0.1 Other industrialized Countries 16.89.55.91.66.6 13.1 7.0 China 18.312.927.815.78.6 12.8 5.5 Other developing countries 28.945.955.480.867.564.770.1 © 2016 McGraw-Hill Education. All Rights Reserved. 16

17. 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) 8.170.8581 Corn (044) 9.711.0281 Coffee (071) 1.287.26-70 Soybeans (2222) 24.740.3597 Coal (321) 14.880.9388 Crude petroleum (333) 2.4321.86-99 Primary plastic material(57) 34.4913.843 Insecticides and herbicides (591) 3.310.8958 Aircraft (792) 104.224.3162 Clothing and accessories (84) 5.5887.96-88 Shoes and footwear (85) 1.3324.86-90 Toys (8942) 0.9611.55-85 © 2016 McGraw-Hill Education. All Rights Reserved. 17 Products Whose Trade is Consistent with H-O Theory

18. 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) 44.5968.66-21 Perfumes and cosmetics (553) 8.217.058 Iron and steel (67) 20.8244.96-37 Automobiles (7812) 53.9149.14-47 Medical instruments (872) 21.4616.214 © 2016 McGraw-Hill Education. All Rights Reserved. 18 Products Whose Trade Appears to Be Inconsistent with H-O Theory

19. What Are the Export-Oriented and Import-Competing Factors? © 2016 McGraw-Hill Education. All Rights Reserved. 19 The U.S. Pattern

20. What are the Export-Oriented and Import-Oriented Factors? © 2016 McGraw-Hill Education. All Rights Reserved. 20 The Canadian Pattern

21. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 21

22. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 22

23. 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. © 2016 McGraw-Hill Education. All Rights Reserved. 23

24. China: Value of Exports and Value of Imports, 1976-2012 © 2016 McGraw-Hill Education. All Rights Reserved. 24

25. China’s International Trade, 2012 China's Exports ($billions)China's Imports ($billions) Soybeans (2222)0.335 Metal ores (28)0.5158.7 Crude petroleum (333)2.2220.8 Metalworking machinery (73)6.918.2 Computers (752)169.435.1 Audio equipment (763)2010.1 Electronic microcircuits (7764)54.3192.7 Aircraft (792)1.617.6 Clothing and accessories (84)159.64.5 Shoes and other footwear (85)46.81.8 Toys (8942)11.50.3 Vegetables (054 and 056)10.62.7 Textiles and leather machinery (724)4.74.6 © 2016 McGraw-Hill Education. All Rights Reserved. 25