If trade makes a country richer, why do some of its workers lose?
Free trade can raise a country's total income and still cut the pay of one group inside it. A 1941 theorem spells out who, under its assumptions.
▶ Start the storyBecause "the country gains" is a total, and trade changes prices that people's pay depends on. Economists have a precise statement of this. The Heckscher–Ohlin model says countries export the products that use their relatively abundant and cheap factors of production and import the products that use their relatively scarce factors. A country with plenty of capital and land but few workers, for instance, has a comparative advantage in goods needing lots of capital and land and little labor, such as grains.
The Stolper–Samuelson theorem, derived in 1941 by Wolfgang Stolper and Paul Samuelson, then asks what trade does to pay. Under specific assumptions, a rise in the relative price of a good raises the real return to the factor used most intensively in making it, and lowers the real return to the other factor. Applied to trade, the robust finding is that returns to the scarce factor go down. In a high-skill country, unskilled workers producing traded goods will be worse off as international trade increases.
Step 1: Country opens to trade
Relative prices change
Step 2: Price of the labor-intensive good falls
Step 3: The scarce factor's return falls
More than the price fell
Step 4: Compensation could offset it
In principle, per the corollary
So winners and losers are built in. Trade liberalisation can sometimes result in unequally distributed losses and gains, and in the short run can cause economic dislocation of workers in import-competing sectors, even though it lowers costs of goods for producers and consumers.
The theory also contains a hopeful corollary: a compensation to the scarce factor exists which will overcome the loss and make increased trade Pareto optimal. President Kennedy argued that those injured by import competition should not bear the full brunt, and that the burden of adjustment should be borne in part by the federal government.
Critics
- Leontief paradox troubles H–O
- Feenstra: H–O hopelessly inadequate
- Davis and Mishra: inequality rose in Latin America
Defenders
- Theorem links prices to relative wages
- Moderate-to-strong support in Chile, Mexico, Brazil
- Holds in less restricted models
Quiz me
0/3
Recap
A country can gain from trade while one group in it loses, and whether the loss is big or small is an empirical question.
💡 A trick to remember it · Trade moves prices, prices move pay: the factor you have little of, relative to the world, is the one that gets squeezed.
Surprising fact · The theorem also implies that winners could compensate losers and make trade Pareto optimal.
Sources (5)
No source, no claim. Every fact in this lesson (18 claims) cites at least one of these.