Specific Factors and Income
Distribution
As we saw in Chapter 3, international trade can be mutually beneficial to
the nations engaged in it. Yet throughout history, governments have
protected sectors of the economy from import competition. For example,
despite its commitment in principle to free trade, the United States limits imports
of textiles, sugar, steel, and other commodities. If trade is such a good thing for
the economy, why is there opposition to its effects? To understand the politics of
trade, it is necessary to look at the effects of trade not just on a country as a
whole, but on the distribution of income within that country.
The Ricardian model of international trade developed in Chapter 3 illustrates
the potential benefits from trade. In that model, trade leads to international specialization,
with each country shifting its labor force from industries in which
that labor is relatively inefficient to industries in which it is relatively more efficient.
Because labor is the only factor of production in that model, and it is
assumed that labor can move freely from one industry to another, there is no
possibility that individuals will be hurt by trade. The Ricardian model thus suggests
not only that all countries gain from trade, but also that every individual is
made better off as a result of international trade, because trade does not affect
the distribution of income. In the real world, however, trade has substantial
effects on the income distribution within each trading nation, so that in practice
the benefits of trade are often distributed very unevenly.
There are two main reasons why international trade has strong effects on the
distribution of income. First, resources cannot move immediately or without cost
from one industry to another—a short-run consequence of trade. Second, industries
differ in the factors of production they demand. A shift in the mix of goods
that a country produces will ordinarily reduce the demand for some factors of
production, while raising the demand for others—a long-run consequence of
trade. For both of these reasons, international trade is not as unambiguously beneficial
as it appeared to be in Chapter 3. While trade may benefit a nation as a
whole, it often hurts significant groups within the country in the short run, and
potentially, but to a lesser extent, in the long run.
CHAPTER 4 Specific Factors and Income Distribution 51
Consider the effects of Japan’s rice policy. Japan allows very little rice to be
imported, even though the scarcity of land means that rice is much more expensive
to produce in Japan than in other countries (including the United States).
There is little question that Japan as a whole would have a higher standard of
living if free imports of rice were allowed. Japanese rice farmers, however,
would be hurt by free trade. While the farmers displaced by imports could probably
find jobs in manufacturing or services, they would find changing employment
costly and inconvenient: The special skills they developed for rice farming
would be useless in those other jobs. Furthermore, the value of the land that the
farmers own would fall along with the price of rice. Not surprisingly, Japanese
rice farmers are vehemently opposed to free trade in rice, and their organized
political opposition has counted for more than the potential gains from trade for
the nation as a whole.
A realistic analysis of trade must go beyond the Ricardian model to models in
which trade can affect income distribution. In this chapter, we focus on the
short-run consequences of trade on the income distribution when factors of production
cannot move without cost between sectors. To keep our model simple,
we assume that the sector-switching cost for some factors is high enough that
such a switch is impossible in the short run. Those factors are specific to a particular
sector.
LEARNING GOALS
After reading this chapter, you will be able to:
• Understand how a mobile factor will respond to price changes by moving
across sectors.
• Explain why trade will generate both winners and losers in the short run.
• Understand the meaning of gains from trade when there are losers.
• Discuss the reasons why trade is a politically contentious issue.
• Explain the arguments in favor of free trade despite the existence of losers.
Distribution
As we saw in Chapter 3, international trade can be mutually beneficial to
the nations engaged in it. Yet throughout history, governments have
protected sectors of the economy from import competition. For example,
despite its commitment in principle to free trade, the United States limits imports
of textiles, sugar, steel, and other commodities. If trade is such a good thing for
the economy, why is there opposition to its effects? To understand the politics of
trade, it is necessary to look at the effects of trade not just on a country as a
whole, but on the distribution of income within that country.
The Ricardian model of international trade developed in Chapter 3 illustrates
the potential benefits from trade. In that model, trade leads to international specialization,
with each country shifting its labor force from industries in which
that labor is relatively inefficient to industries in which it is relatively more efficient.
Because labor is the only factor of production in that model, and it is
assumed that labor can move freely from one industry to another, there is no
possibility that individuals will be hurt by trade. The Ricardian model thus suggests
not only that all countries gain from trade, but also that every individual is
made better off as a result of international trade, because trade does not affect
the distribution of income. In the real world, however, trade has substantial
effects on the income distribution within each trading nation, so that in practice
the benefits of trade are often distributed very unevenly.
There are two main reasons why international trade has strong effects on the
distribution of income. First, resources cannot move immediately or without cost
from one industry to another—a short-run consequence of trade. Second, industries
differ in the factors of production they demand. A shift in the mix of goods
that a country produces will ordinarily reduce the demand for some factors of
production, while raising the demand for others—a long-run consequence of
trade. For both of these reasons, international trade is not as unambiguously beneficial
as it appeared to be in Chapter 3. While trade may benefit a nation as a
whole, it often hurts significant groups within the country in the short run, and
potentially, but to a lesser extent, in the long run.
CHAPTER 4 Specific Factors and Income Distribution 51
Consider the effects of Japan’s rice policy. Japan allows very little rice to be
imported, even though the scarcity of land means that rice is much more expensive
to produce in Japan than in other countries (including the United States).
There is little question that Japan as a whole would have a higher standard of
living if free imports of rice were allowed. Japanese rice farmers, however,
would be hurt by free trade. While the farmers displaced by imports could probably
find jobs in manufacturing or services, they would find changing employment
costly and inconvenient: The special skills they developed for rice farming
would be useless in those other jobs. Furthermore, the value of the land that the
farmers own would fall along with the price of rice. Not surprisingly, Japanese
rice farmers are vehemently opposed to free trade in rice, and their organized
political opposition has counted for more than the potential gains from trade for
the nation as a whole.
A realistic analysis of trade must go beyond the Ricardian model to models in
which trade can affect income distribution. In this chapter, we focus on the
short-run consequences of trade on the income distribution when factors of production
cannot move without cost between sectors. To keep our model simple,
we assume that the sector-switching cost for some factors is high enough that
such a switch is impossible in the short run. Those factors are specific to a particular
sector.
LEARNING GOALS
After reading this chapter, you will be able to:
• Understand how a mobile factor will respond to price changes by moving
across sectors.
• Explain why trade will generate both winners and losers in the short run.
• Understand the meaning of gains from trade when there are losers.
• Discuss the reasons why trade is a politically contentious issue.
• Explain the arguments in favor of free trade despite the existence of losers.
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