Home > International Trade, Journalism and Economics, Tax Policy > Stolper-Samuelson Says That?

Stolper-Samuelson Says That?

Public Citizen objects to any positive read on the NBER study that shows NAFTA has brought a small increase in real wages to U.S. workers, citing “standard trade theory”:

…the Stolper-Samuelson effect predicts that open trade will create increased demand for U.S. capital-intensive goods and reduced demand for U.S. labor-intensive goods, thereby increasing income for capital owners (i.e. the wealthy) while reducing wages for workers.  Under NAFTA, this regressive impact has moved from theory to reality.

In fact, the Stolper-Samuelson effect predicts that under certain conditions the owners of the factor of production used intensively will benefit more from trade than the owners of a factor that is relatively more scarce. It doesn’t say that open trade will create increased demand for U.S. capital intensive goods (that’s a function of relative capital abundance in the U.S. and the industries that produce goods that use capital intensively).

The Public Citizen post is all the more curious for bemoaning the loss of tariff revenue to the governments, but ignoring completely the reduction to deadweight loss associated with tariffs in “standard trade theory” as well as the improvement in aggregate economic welfare that comes when people are free to buy and sell to whomever they wish to, without some government stopping them in order to favor certain producers.

Looks like standard trade theory only works for Public Citizen when it suits their ideological purpose of furthering a “trade is bad for U.S. workers” meme.

Finally, a question. Let’s assume NAFTA is bad for U.S. workers because trade disproportionally benefits the owners of the factor used in the production of goods for which the U.S. is relatively abundant in (capital, in this case). Further, assume the U.S. government negotiated this in the interest of capital owners–and at workers’ expense.

So…who benefits in Mexico? Is the government of Mexico less beholden to the interest of capital owners? Because if Public Citizen is going to invoke Stolper-Samuelson, it should be ready to accept that the main beneficiaries of trade in Mexico would be workers, since presumably Mexico has comparative advantage in goods that intensively use the factor for which it has relative abundance, and trade would increase capital to labor ratios in Mexico, and real returns to labor.

Is Public Citizen ready to admit that NAFTA must have been disproportionately good for workers in Mexico (or Canada for that matter)? And if so, why are capital owners especially powerful in controlling the U.S. government, but owners of capital in Mexico can’t seem to get deals negotiated in their interest?

Someone needs to go back and review “standard trade theory” and find out what the Stolper-Samuelson theorem means before using it to fit a “trade benefits the wealthy” story.

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