In: Economics
Explain why the Stolper-Samuelson theorem predicts that owners of capital in the USA would prefer free trade. Then explain why we actually observe examples of capital owners in the USA advocating protectionism. (10 Marks, maximum word limit: 250 words)
SS Model & US Trade
Stolper-Samuelson theorem of international trade put forward the
relationship between factors of production and the relative price
of the commodity. An increase in the relative price of the
commodity will increase the returns for the intensive factor used
in the production of that commodity and reduce the returns for
other factors. As the theory suggests, capital intensive
commodities as it increase its relative price, the return for the
factor capital will increase and that of other factors will
reduce.
US being a capital intensive country, the theorem suggest US
capital owners will choose free trade because a rise in the
relative price of the capital intense good will give increased
returns to the factor capital. The ability of US to produce capital
intensive goods cheaper than others will give them the benefit of
high relative price in the world market thus giving increased
returns to the factor capital.
The free market situation led to the supply of technology and other
factors to different markets all over the world. Other countries
which are labor intensive, started to produce capital intensive
goods even cheaper than US with the advantage of free trade. Since
US lack the necessary labor supply, labor is the expensive factor
of production there. Countries which are able to produce with cheap
labor through increased technology and free trade could achieve
capital also cheaper. US capital owners find it difficult to
compete with countries those get advantage from free trade. They
lose the advantage of capital intensity and thus retaining the
factor from earning better returns.