Growing World Trade: Causes and Consequences

Abstract

Abstract A highly stylised model of global trade, employment, and wages is developed to analyse the effects of trade with newly industrialised countries (NIEs). It is argued that as NIEs grow, their comparative advantage may shift away from products of very low skill intensity. The extreme view that growing international trade will lead to full factor price equalisation, i.e., wages for unskilled labour in OECD countries will be driven down to their average levels in the world, neglects the fact that this only works so long as a country remains non-specialized. If the change in relative prices is large enough that the OECD no longer produces goods that compete with low-skill imports, any further reduction in the relative price of these goods will have no impact on income distribution. There are also limits to the change in relative wages that trade flows can produce.

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