Political economy effects. Consider an economy in which two factors of production, labor and capital, produce two goods, capital-intensive pharmaceuticals and labor-intensive clothing. Suppose that both factors of production are freely mobile across both industries and that all producers, consumers, capitalists, and workers are price-takers. Suppose that there are currently steep tariffs on all imported goods, but there is a bill before Parliament to eliminate those tariffs, and the government has invited citizen representatives of workers and capitalists to express their opinions on the matter. Suppose that all citizen representatives understand the consequences of eliminating the tariffs, and suppose as well that each representative simply wants to maximize his or her real income. The parliamentary hearing takes testimony from four groups, representing workers in the clothing industry, capitalists in the clothing industry, workers in the pharmaceuticals industry, and capitalists in the pharmaceuticals industry, respectively.

a) If this economy is capital-abundant relative to the rest of the world, which of these four groups do you expect to support the tariff-elimination bill, and which do you expect to oppose it? Why?

b) Now, suppose that the country is labor- abundant relative to the rest of the world, and answer the same question, explaining any differences there might be with the previous answer.

c) How would your answer now change if, instead of being freely mobile, we assumed that both labor and capital were sector-specific?

d) Comment on how the mobility or immobility of factors across industries affects the nature of political conflict we can expect to see over trade policy.

Source:

John McLaren, International Trade , Economic Analysis of Globalization and Polic, Wiley, 2013