KEY POINTS

  1. Opening a country to international trade leads to overall gains, but in a model with several factors of production, some factors of production will lose.
  2. The fact that some people are harmed because of trade sometimes creates social tensions that may be strong enough to topple governments. A recent example is Bolivia, where the citizens in the early 2000s could not agree on how to share the gains from exporting natural gas.
  3. In the specific-factors model, factors of production that cannot move between industries will gain or lose the most from opening a country to trade. The factor of production that is specific to the import industry will lose in real terms, as the relative price of the import good falls. The factor of production that is specific to the export industry will gain in real terms, as the relative price of the export good rises.
  4. In the specific-factors model, labor can move between the industries and earns the same wage in each. When the relative price of either good changes, then the real wage rises when measured in terms of one good but falls when measured in terms of the other good. Without knowing how much of each good workers prefer to consume, we cannot say whether workers are better off or worse off because of trade.
  5. Economists do not normally count the costs of unemployment as a loss from trade because people are often able to find new jobs. In the United States, for example, about two-thirds of people laid off from manufacturing or services companies find new jobs within two or three years, although sometimes at lower wages.
  6. Trade Adjustment Assistance policies are intended to compensate those who are harmed because of trade by providing additional income during the period of unemployment. Recently, the Trade Adjustment Assistance program in the United States was expanded to include workers laid off because of trade in service industries.
  7. Even when many people are employed in export activities, such as those involved in coffee export from certain developing countries, fluctuations in the world market price can lead to large changes in income for growers and workers.