Page 219 - Global Political Economy_Understanding The International Economic Order

CHA PTER E IGHT
within certain limits, manage a nation’s rate ofunemployment. In a
well-functioning economy, trade does not decrease or increase unem-
ployment. While NAFTA has not affected the number of jobs in the
American economy, it has redistributed jobs from one economic sec-
tor or region ofthe country to others. In Western Europe, the high
rate ofunemployment has been a consequence of several factors: in-
flexible labor markets, overly generous welfare programs that dis-
courage expanded employment, and highly restrictive macroeconomic
policies associated with meeting the requirements for nations to join
the European Monetary Union. Domestic factors and not interna-
tional trade have been the major causes ofWestern Europe’s high
level ofchronic unemployment.
Trade, however, does create losers as well as winners in the areas
ofboth wages and employment. Economic sectors in which a nation
possesses or wins a comparative advantage gain from trade, while
sectors in which a nation loses comparative advantage suffer. As los-
ers frequently feel the pain more acutely than winners feel the gain,
both ethical and political reasons make it necessary that national pol-
icy assist or compensate workers and others harmed by trade liberal-
ization. In any case, the worst response a nation can make to inevita-
ble shifts in comparative advantage is to close itself off from the
stimulus oftrade competition.

Revisions of Conventional Trade Theory
Since its development in the early 1930s by Eli Heckscher and Bertil
Ohlin, the factor endowments or factor proportions model has been
accepted as the standard explanation ofinternational trade. The
Heckscher-Ohlin (or H-O) model ofcomparative costs or advantage
postulates that a country will specialize in the production and export
ofthose products in which it has a cost advantage over other coun-
tries. This theory is based on assumptions ofconstant returns to scale,
universal availability ofproduction technologies, and determination
ofa country’s comparative advantage and trade pattern by its factor
16
endowments. This theory implies that:
(1) A country will export those products that are intensive in its
abundant factor; that is, a capital-rich country will export capi-
tal-intensive goods.
16
This section draws on Ronald Rogowski’s highly innovative paper entitled, “How
Economies-of-Scale Trade Affects Domestic Politics,.” Center for International Rela-
tions, Working Papers No. 13, May 1997, University ofCalifornia, Los Angeles.
206