Chapter 8: International trade and inequality within countries
This chapter explores the relationship between trade and inequality within countries. Discussions about the pros and cons of trade too often stop at whether or not it is in the national interest. Questions about winners and losers within countries can be at least as important. Indeed, these distributional issues are often the crux of the matter. Countries are internally divided and the ‘national interest’ is illusive. Questions of who gains and who loses are critical. The most influential proposition has been the Stolper–Samuelson theorem, a neo-classical theory which argues that there are likely to be winners and losers within countries from both protection and trade opening. As explained in the next section, according to this theorem, the owners of those factors of production in which a country is abundantly endowed are expected to reveal their efficiency on a world scale and increase their market and the prices received for their labour or for their products. Conversely, in a closed economy, the effective market remains limited and prices are kept down. Meanwhile, the owners of those factors of production that are relatively scarce within a country would be expected to be in the opposite situation. Having enjoyed protection, exposure to foreign competition would reveal their relative costliness and undermine their economic position. The theory has been widely invoked to explain concomitant rises in trade and inequality in recent decades, particularly in rich countries.
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