Trade and Factors of Production, the sequel

As we have discussed a few times in class, one of the main running themes (of this first part of understanding IPE) is the linkage between trade and factors of production. In particular, how patterns of trade are affected by the relative abundance of factors of production.

The point of departure was comparative advantage. Opening trade tends to lead labor-rich countries to produce labor-intensive goods and capital-rich countries to produce capital-intensive goods. That is, you tend to produce in things that make use of your most abundant factors of production. (This is known in economics as the Heckscher-Ohlin theorem.) As an example to support your intuition, think of China and the U.S. trading. The expectation would be that China will produce goods that make use of lots of labor, because China has lots of labor and by extension, labor in China is rather cheap compared to the U.S. (At least low- to moderately-skilled labor. The story is less clear when we get to high-skilled labor. Of course, even the definition of what "high-skilled" means will be changing over time, and so on. But in general, think of China producing non-high-tech goods in big factories, using lots of labor to do so.)

We can summarize another main conversation item thus far in the same terms: objections to free trade in industrialized countries like the U.S. tend to focus on trade's impact on the factor of production that is relatively scarce in rich countries: low- to moderately-skilled labor. Those are the people likeliest to be hurt by trade. All your economists' theories and studies of aggregate gains and consumer surplus and comparative advantage and long-run equilibrium sound a bit ivory-towerish to someone who lost their job. Especially those for whom, as Stiglitz worried, adequate protection or social support never really happened. (Considering labor and capital as the two main factors of production, there is a profound moral and philosophical question about whether we should be concerned primarily about opportunities for laborers and consumers - because workers are human and capital is not - or also about opportunities for non-human capital, which ultimately is the basis for human wealth, but I will not address that at length here.)

So in a sense, our conversation has very much been about trade and factors of production. Think about how Ronald Rogowski.builds on this. He makes reference to the Stolper-Samuelson theorem, which builds upon our discussion of factor price equalization and extends the logic above:
* When trade increases, returns to a country's abundant factor of production increase.
Ex.: Trade increases, wages for Chinese workers increase
Ex.: Trade increases, returns to American capital increase
* By the same logic, decreasing trade (or protectionism of various kinds) advantages the scarce factor of production.
Ex.: American laborers seek protection from goods made by Chinese laborers
Ex.: Chinese capital might want not to compete with American capital (in several ways we can discuss)

The issue for Rogowski is not only the trade theory dynamics, but the political effects or consequences of these dynamics. Notice that he considers three factors of production: labor, capital, and land. Pay attention to his evidence. Look at what he claims to be able to explain historically, using little more than the trade theory we have discussed thus far.