Question

What are predictors of pro or anti-free trade sentiment?

Answer 1

Free Trade, as we understand, is a situation when there is a flow of goods and services, free of any barriers to trade imposed by government or International Organizations.

Pro-Trade Sentiments are expressed by those people who favor a free flow of goods and services among economies and believe it is beneficial for all. Whereas Anti-Trade Sentiments are expressed by those who believe a free flow of goods and services will harm their interests.

Before we get on further, we need to keep in mind the Heckscher-Ohlin theorem of International Trade, which states that in a two-economy case - "A capital-abundant country will export the capital-intensive good, while the labour-abundant country will export the labour-intensive good." In simple words, a country will export goods and services produced, which utilizes its abundant resource and import goods and services, which it cannot produce due to lack of availability of the resource. The logic behind this is the cost of production. Goods and Services which can be produced using easily available resources will have a low cost of production. It makes sense for a country to import those goods and services, which it cannot produce cheaply.

What are the Predictors of Pro-Trade Sentiments?

To understand, who and under what circumstances do people support or not support free trade, we need to consider the below factors/ situations:

1. Quality of Human Capital - Human Capital of an economy comprises of the available and employable human resources/workforce - skilled, semi-skilled and unskilled. The more educated and formally trained workforce of an economy leads to a better quality workforce with the ability to be employed in higher paid jobs. Usually, the higher the quality of human capital, the more in favour of free trade will the people be. This sentiment is more pronounced in developed economies, who prefer a free trade in goods and services where their trained human skills have been used. In contrast, less-developed and underdeveloped economies will resist free trade. The reason being the proportion of their population with skilled labour is lower compared to developed nations and the proportion of their population with semi-skilled and unskilled labour is higher. If the skilled labour of less-developed and underdeveloped economies have to compete with the skilled labour of developed economies, they will be unable to do so, due to the higher cost of skilled human capital consistent with the Heckscher-Ohlin Theorem. Less developed countries will prefer trading in goods and services which require more of semi-skilled and unskilled labour, as it is cheaper and therefore the goods and services are less expensive.

2. Income higher than National Average - For those individuals who enjoy a personal income higher than the national average, will be more in favor of free trade as they believe that free trade is for the good of all. However, those individuals whose personal income is lower than national average will be more skeptical towards free trade, not knowing how it will affect their current position and will be, therefore, more protectionist in their outlook, believing that a free flow of goods and services might actually hurt their interests, as they will be in a weaker bargaining position.

3. Nationalist Sentiments - This factor is explained by irrational behavior. When people start believing that free trade will lead to inflow of goods and services (if these are cheaper), which might harm domestic industries and thereby hurt national sentiments. We are talking about national pride. A prime example of this is the protection of domestic small and medium industries, handloom and cottage industries, which produce labor-intensive, traditional/ethnic goods (like textiles); not on a mass scale. If such goods start getting produced on a mass scale through machines, the cost of production being cheaper will attract more customers but will hurt the traditional producers of such goods.

4. Resource-Intensive - For those economies, which are more populous and are specialized in the production of goods and services that require more labor than capital, will be anti-free trade. This is because they would want to protect the interests of their domestic labor. Such economies will be averse to importing the same goods and services using capital-intensive technology, even though cheaper as it will result in the dumping of the economy with such goods. The opposite will also be true. Capital-abundant countries will be anti-free-trade for those goods and services which will be much more cheaply imported, thus hurting the domestic labor interests.