So far we have focused on the effects of international trade on producers and consumers in a particular industry. For many purposes this is a very helpful approach. However, producers and consumers are not the only parts of society affected by trade—so are the owners of factors of production. In particular, the owners of labor, land, and capital employed in producing goods that are exported, or goods that compete with imported goods, can be deeply affected by trade.

Moreover, the effects of trade aren’t limited to just those industries that export or compete with imports because factors of production can often move between industries. So now we turn our attention to the long-run effects of international trade on income distribution—how a country’s total income is allocated among its various factors of production.

To begin our analysis, consider the position of Maria, an accountant at West Coast Phone Production, Inc. If the economy is opened up to imports of phones from China, the domestic phone industry will contract, and it will hire fewer accountants. But accounting is a profession with employment opportunities in many industries, and Maria might well find a better job in the automobile industry, which expands as a result of international trade. So it may not be appropriate to think of her as a producer of phones who is hurt by competition from imported parts. Rather, we should think of her as an accountant who is affected by phone imports only to the extent that these imports change the wages of accountants in the economy as a whole.

The wage rate of accountants is a factor price—the price employers have to pay for the services of a factor of production. One key question about international trade is how it affects factor prices—not just narrowly defined factors of production like accountants, but broadly defined factors such as capital, unskilled labor, and college-educated labor.

Earlier in this chapter we described the Heckscher-Ohlin model of trade, which states that comparative advantage is determined by a country’s factor endowment. This model also suggests how international trade affects factor prices in a country: compared to autarky, international trade tends to raise the prices of factors that are abundantly available and reduce the prices of factors that are scarce.

We won’t work this out in detail, but the idea is simple. The prices of factors of production, like the prices of goods and services, are determined by supply and demand. If international trade increases the demand for a factor of production, that factor’s price will rise; if international trade reduces the demand for a factor of production, that factor’s price will fall.

Now think of a country’s industries as consisting of two kinds: exporting industries, which produce goods and services that are sold abroad, and import-competing industries, which produce goods and services that are also imported from abroad. Compared with autarky, international trade leads to higher production in exporting industries and lower production in import-competing industries. This indirectly increases the demand for factors used by exporting industries and decreases the demand for factors used by import-competing industries.

In addition, the Heckscher-Ohlin model says that a country tends to export goods that are intensive in its abundant factors and to import goods that are intensive in its scarce factors. So international trade tends to increase the demand for factors that are abundant in our country compared with other countries, and to decrease the demand for factors that are scarce in our country compared with other countries. As a result, the prices of abundant factors tend to rise, and the prices of scarce factors tend to fall as international trade grows.

In other words, international trade tends to redistribute income toward a country’s abundant factors and away from its less abundant factors.

U.S. exports tend to be human-capital-intensive (such as high-tech design and Hollywood movies) while U.S. imports tend to be unskilled-labor-intensive (such as phone assembly and clothing production). This suggests that the effect of international trade on the U.S. factor markets is to raise the wage rate of highly educated American workers and reduce the wage rate of unskilled American workers.

This effect has been a source of much concern in recent years. Wage inequality—the gap between the wages of high-paid and low-paid workers—has increased substantially over the last 30 years. Some economists believe that growing international trade is an important factor in that trend. If international trade has the effects predicted by the Heckscher-Ohlin model, its growth raises the wages of highly educated American workers, who already have relatively high wages, and lowers the wages of less educated American workers, who already have relatively low wages. But keep in mind another phenomenon: trade reduces the income inequality between countries as poor countries improve their standard of living by exporting to rich countries.

How important are these effects? In some historical episodes, the impacts of international trade on factor prices have been very large. As we explain in the following Economics in Action, the opening of transatlantic trade in the late nineteenth century had a large negative impact on land rents in Europe, hurting landowners but helping workers and owners of capital.

The effects of trade on wages in the United States have generated considerable controversy in recent years. Most economists who have studied the issue agree that growing imports of labor-intensive products from newly industrializing economies, and the export of high-technology goods in return, have helped cause a widening wage gap between highly educated and less educated workers in this country. However, most economists believe that it is only one of several forces explaining the growth in American wage inequality.