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Below is an excerpt from a September 10, 2006 Associate Press article on the breakdown of global trade negotiations

Economics Sep 08, 2020

Below is an excerpt from a September 10, 2006 Associate Press article on the breakdown of global trade negotiations.The G-20 issued a statement Saturday indicating developing nations we unlikely to back off their demands that developed nations do away with subsides and tariff barriers from their farm products."Most of the the world's poor make their living out of agriculture. Their livelihood and standards of living are seriously jeopardized by subsides and market-access barriers prevailing in international agricultural trade" the group said in the statement.Powerful farm lobbies in the U.S., Europe, and Japan, however, strongly oppose an end to subsides, a move they fear would leave them unable to compete with the flood of cheap imports.A) Can the Specific Factors Model explain the position of the developing countries? What about the developed countries? Explain how these two positions are or are not consistent with this model.B) Can the Heckscher-Ohlin Model explain the position of the developing countries? What about the developed countries? Explain how these two positions are or are not consistent with this model.

Expert Solution

The Specific Factors Model predicts that while labor can move freely between sectors, there are other factors specific to sectors or industries which are immobile. This model explains how price differentials drive trade. To induce the movement of labor, the export firms will raise wages. Since all labor is alike (the model assumes labor is homogeneous) the import-competing sector will have to raise their wages in step so as not to lose all of its workers. The higher wages will induce the expansion of output in the export sector (the sector whose price rises) and a reduction in output in the import-competing sector. The adjustment will continue until the wage rises to a level that equalizes the value of marginal product in both industries. Thus owners of capital in the export sector will gain at the expense of capital owners in the import-competing sector and the effects on workers in both industries is ambiguous. This model isn't really consistent with the position of the developing nations. Their capitalists will suffer and their workers will not gain with tariffs and subsidies. It definitely isn't consistent with the developed nations' stance. They are better off with the trade barriers.The Heckscher-Ohlin Model predicts that free trade between would premit countries with abundant unskilled labor to have the advantage in goods which are intensive in unskilled labour while countries whose strengths are in capital and skilled labor would have the advantage in other goods. If the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries. This implies that free trade will equalize the wages of workers and the rents earned on capital throughout the world. Income will be redistributed from owners of a country's scarce factor, who will lose, to owners of a country's abundant factor, who will gain. As the capital adjusts between industries, outputs and wage rates also adjust. Because the expanding export industry is capital-intensive, its demand of capital per worker is greater than the amount of capital per worker that the labor-intensive import industry is able to give up. The percentage change in the wage rate is less than the changes in both output prices indicating an absolute reduction in the purchasing power of all workers' wages. This model is consistent with the views of the developed nations. While workers lose in free trade with this model, capitalists gain. The arguments for free trade seem to be given by capitalists, not the workers, in the developed nations. The model is also consistent with the views of the developing nations who are concerned about the wages of their agricultural workers.

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