Citizen Preferences over trade
& what governments might do about it
(brought to you by:
Factors, Sectors, & Institutions)
Plan for THIS PART tonight:
1.
Why do countries engage in trade?
2.
Why does a country have a “comparative advantage” in one
industry but not another?
3.
Why is there protectionism?
4.
Who is against immigration?
5.
Is it factors or sectors?
Take-away: Abundant factors win from globalization
(intuition: supply & demand)
In a closed economy (autarky),
Papa Smurf is in high demand.
And he has a lot of cheap labor.
WINNERS
FROMTRADE!
TRADE!
LOSERS FROM
But imagine there’s another
country out there with lots of
“Papas” and only one regular
smurf.
If these countries
trade,
Meantime,
the demand
the regular
supply of
Papa-goods
for
smurf-goods
(for
the 1st country)
goes
(worldwide)
goes way
way
(and
price
up –up
and
so the
does
theirway
down)
price.
Why do countries engage in trade?
• Ricardian model: 2 countries, 2 goods &
CONSTANT opportunity costs
• Logic of COMPARATIVE ADVANTAGE
Example is a li’l
out of date…
• One American worker can produce more computers
or more shoes than one Brazilian worker
• US has an ABSOLUTE ADVANTAGE in both
computers and shoes
• So why trade?
Differences in opportunity costs!
• Suppose we move one American worker from
Computers to Shoes
• We lose 50 computers for 200 shoes
• For each additional pair of shoes produced, the
US must forgo 0.25 computers (50/200=¼)
• The (constant) opportunity cost of each pair of
shoes is ¼ computer
• The (constant) opportunity cost of each
computer is 4 pairs of shoes (200/50=4)
Differences in opportunity costs!
• Suppose we move one Brazilian worker from
Computers to Shoes
• We lose 5 computers for 175 shoes
• For each additional pair of shoes produced,
Brazil must forgo 0.03 computers (5/175=0.029)
• The (constant) opportunity cost of each pair of
shoes is 0.03 computer
• The (constant) opportunity cost of each
computer is 35 pairs of shoes (175/5=35)
Critical point
• Where is it RELATIVELY cheaper to
produce computers?
– In the US it costs 4 shoes
– In Brazil it costs 35 shoes
• Where is it RELATIVELY cheaper to
produce shoes?
– In the US it costs 0.25 computer
– In Brazil it costs 0.03 computer
Why does one country have a comparative
advantage in one area?
• Heckscher-Ohlin:
• Compared to the availability of capital & labor in one country,
another country will have relatively more or less
• Capital-abundant countries: Cost of capital relative to wages is lower
• Labor-abundant countries: Wages relative to cost of capital is lower
• H-O suggests that countries have an advantage in producing
different commodities because of the different factor endowments of
countries and the different mixtures of these factors involved in
production of different commodities
So why is there protectionism?
Winners & Losers
• Trade: distributional consequences!
• Trade policy:
– shaped by government-responses to interest
groups’ demands
• Government-responses:
– shaped by POLITICAL INSTITUTIONS
Factor incomes & class conflict
• Simplest version:
– labor v. capital
– (workers v. owners of capital)
• Countries have a comparative advantage
in producing goods requiring their
ABUNDANT FACTOR
• There are capital-abundant countries &
labor abundant countries
In the factor model, trade causes…
• Income of the ABUNDANT factor to RISE
• Income of the SCARCE factor to FALL
• Absent trade
– “Capital” is relatively scarce in a country like
China, so the “rent” can be enormous
– Labor is abundant, so wages are low
• By opening up to trade
– Capital “rents” will fall until they equals the
(rising) rate of return in trading partner
countries
– Wages will rise until they equal the (falling)
wage in trading partner countries
• Absent trade
– Labor is relatively scarce in a country like
Switzerland, so wages can be enormous
– Capital is abundant, so returns are low
• By opening up to trade
– Return to capital will rise until it equals the
(dropping) rate in trading partner countries
– Wages will drop until they equal the (falling)
wage in trading partner countries
Stolper-Samuelson Theorem
• Factor-price equalization
• The tendency for trade to cause factor prices to
converge
• Note that the losses for the scarce factor are
NOT sufficiently offset by gains from trade (even
if the net aggregate gains offset net aggregate
losses).
• The scarce factor is a net LOSER!
What do we do about losers?
• Repress them?
– Dictatorship – repression?
– Democracy – tyranny of the majority?
• Compensate them?
– Training?
– Retirement packages?
• Protect them?
– Tariffs, barriers to trade, subsidies
• The answer may depend on political institutions!
Thought experiment
• Suppose 2 factors of production
– (labor & capital)
• The majority of citizens are “labor”
• Under democracy, labor rules
• Under dictatorship, capital rules
• Question: Will the government be pro-trade or not?
Democracy
Capital abundant ???
Labor abundant
Authoritarian
Back to 2 factors (ignoring collective action problem)
Democracy
Capital abundant Labor loses from
trade but has
political power
protectionism
Labor abundant ???
Authoritarian
Back to 2 factors (ignoring collective action problem)
Democracy
Authoritarian
Capital abundant Labor loses from ???
trade but has
political power
protectionism
Labor abundant Labor wins from
trade & has
political power 
free trade
Back to 2 factors (ignoring collective action problem)
Democracy
Capital abundant Labor loses from
trade but has
political power
protectionism
Labor abundant Labor wins from
trade & has
political power 
free trade
Authoritarian
Capital wins from
trade & has
political power
free trade
???
Back to 2 factors (ignoring collective action problem)
Democracy
Capital abundant Labor loses from
trade but has
political power
protectionism
Labor abundant Labor wins from
trade & has
political power 
free trade
Authoritarian
Capital wins from
trade & has
political power
free trade
Capital loses
from trade but
has political
power 
protectionism
Does the factor-approach predict
preferences over “globalization”?
Trade, immigration…
Effect of education on pro-trade attitude by country-factor endowment
Effect of occupational skill on pro-trade attitude by ctry-factor endowment
Who is against immigration?
Mayda, Anna Marie. 2006. Who is Against
Immigration? A Cross-Country Investigation
of Individual Attitudes toward Immigrants. The
Review of Economics and Statistics 88
(3):510-530.
Theory: The Prediction
• In countries characterized by *high skill*
composition of natives relative to immigrants,
– *skilled* individuals should favor immigration
– *unskilled* individuals should oppose immigration
• In countries characterized by *low skill*
composition of natives relative to immigrants,
– *unskilled* individuals should favor immigration
– *skilled* individuals should oppose immigration
The skill composition of natives to immigrants is positively correlated
with GDP per capita (level of development.
The effect of education (skill) is stronger in more developed countries.
The effect of education appears to be economically not culturally driven – holds
only for people in the labor force
Effect of education on pro-immigration attitude by ctry-factor endowment
Effect of education on pro-immigration attitude by ctry-factor endowment
Alternative explanations?
• Non-economic variables also matter
• Concerns about crime rates and cultural effect of
foreigners covary with immigration attitudes
• Racist feelings have a very strong, negative and
significant impact on pro-immigration preferences
• Economic findings are "robust" to the inclusion of cultural
variables
• Important (and sad): non-economic determinants are
relatively more important than the economic variables
(explain more variance)
– R2 of model with/without the economic variables increases 6%
– R2 of model with/without the cultural variables increases 15%
• 
Is it FACTORS or SECTORS?
Factor mobility
• The ease with which labor and capital can move
from one industry to another
• We have implicitly assumed that capital and
labor are highly MOBILE
• All capital is the same (computers, car factories,
etc…)
• All labor is the same (shoe-makers, furnituremakers, steel-workers, etc…)
• But what if factors are highly SPECIFIC?
Sector Incomes & Industry Conflict
• It’s really about computers, shoes, etc…
• Factor mobility is low
• Incomes of labor AND capital in the same SECTOR
(industry) rise and fall together
• Now we do not completely abandon the factor model
• We still use the factor model to tell us which industries
benefit from trade, however,…
• LABOR & CAPITAL EMPLOYED IN INDUSTRIES
THAT RELY INTENSIVELY ON SOCIETY’S
ABUNDANT FACTOR BOTH GAIN FROM TRADE
Advanced industrial countries
• Capital abundant, so…
• Capital AND labor employed in capitalintensive industries both gain from trade
• The export-oriented SECTOR
• Capital AND labor employed in laborintensive industries both lose from trade
• The import-competing SECTOR
Developing countries
• Labor abundant, so…
• Capital AND labor employed in _______intensive industries both gain from trade
• The export-oriented SECTOR
• Capital AND labor employed in _______intensive industries both lose from trade
• The import-competing SECTOR
Summarizing factors & sectors
• Factor model (abundant factor wins, scarce
loses)
• Sector model (both factors in an abundantfactor-sector win; both factors in a scarcefactor-sector lose)
• What do we about losers?
– Institutions matter!
Take homes
• Trade is “efficient”
• But there are winners & losers
– Globalization winners – factor model: Abundant factor
– Globalization losers – factor model: Scarce factor
– Globalization winners – sector model: Export-oriented sector
– Globalization losers – sector model: Import-competing sector
• Political institutions may influence how we deal with losers
Factors, Sectors, Institutions
Thank you
WE ARE GLOBAL GEORGETOWN!
• When the US
opens up to
trade, they move
from producing
at EaA to PtA.
• So they shift
from shoes to
computers.
• Who gains?
– Capital
• Who loses?
– Labor
• When the US
opens up to
trade, they move
from producing
at EaB to PtB.
• So they shift
from computers
to shoes.
• Who gains?
– Labor
• Who loses?
– Capital
• Rogowski, Ronald. 1987. Political Cleavages
and Changing Exposure to Trade. American
Political Science Review 81 (4):1121-1137.
• 3 factors: land-labor-capital
–
–
–
–
Considers the land-labor ratio
High land-labor ratio  land-abundant, labor-scarce
Low land-labor ratio  labor-abundant, land-scarce
Define “advanced” economies as capital-abundant
Pro-trade
Pro-trade


Peron in
Argentina,


Vargas in
Brazil
Pro-trade
Pro-trade


Examples:
CLASS
CONFLICT
Anti-trade
URBAN-RURAL
CONFLICT
Anti-trade

URBAN-RURAL
CONFLICT
Anti-trade
CLASS
Anti-tradeCONFLICT
