Question

Why are there usually redistributive gains and losses from trade opening? Give examples. If the United States exports high-skilled labor goods and China exports low-skilled labor goods, how is this pattern of trade affecting inequality in the distribution of income in each of the two countries? 


Answer 1

Trade opening or liberalization is process of opening the domestic economy for foreign goods. It allows foreign companies to sell their products in the domestic market and thereby increases competition between domestic and foreign companies. The re-distributive gains of trade opening is cost efficiency and bulk availability of products and services that ultimately benefits the people. Also, domestic companies can also showcase or exports their products in foreign countries that increases their revenues. However, the trade liberalization may also yield negative impacts especially when domestic industries are facing dip in their revenues due to rising cost of production, stagnant demand and high deficit of government. The trade liberalization also leads to fall in industrial output and GDP growth if some foreign countries adopt unfair trade practices such as exporting goods at subsidized prices in the short run. The unfair trade practices are quite prevalent in international trade as several countries resort to unfair trade policies for protecting their own industries and harming the trade interests of rival countries. The unfavorable trade situation also arises when volume of imports of a country is higher than its volume of exports during a specific period. The unfavorable trade position adversely affects the financial health of the government and increases the budgetary deficit of a government. It also decreases domestic output, employment opportunities and income potentials of people.

The cost of producing high skilled goods is higher than cost of producing low skilled goods. If US exports high skilled goods and China exports low skilled goods then US goods will be in high demand in countries where people prefer to buy quality goods over low quality goods. No doubt, low skilled goods are comparatively cheaper than the high quality goods and these goods are in high demand in poor and developing countries where people cannot afford to purchase costly goods. Therefore, in the short run, the exports of low skilled goods by China will generate high revenue of China and boost its GDP growth and ultimately increases income distribution of people in China. But exports of high skilled goods by US will be comparatively lower than China in the developing countries and therefore, export revenue of US will be low that will also affect the GDP growth rate, employment and income distribution of people in the US economy.