The Standard Trade Theory: How far Does it Go?

The theory underlying the debate on the link between trade liberalization and widening wage-gap has been the Heckscher-Ohlin-Samuelson (HOS) model of trade. The cornerstone of the trade theorists’ argument is one of its core propositions, the celebrated Stolper-Samuelson theorem: Increased unskilled labour-intensive imports from countries such as China or Mexico and the consequent fall in the domestic price of the import-competing goods in the US depresses the unskilled wage and raises the skill wage thereby widening the wage-gap. There are, however, two major problems with this argument. First, there is no clear empirical evidence regarding the fall in the domestic price of the unskilled labour-intensive import-competing goods in the US which triggers the StolperSamuelson result, i.e., causes the relative wage to move against the unskilled labour [Bhagwati (1995), Learner (1995)]. Second, following the Heckscher-Ohlin argument, increased trade with the developed countries (DCs) should imply a declining wage-gap in the less developed countries (LDCs) abundant in the unskilled labour. But, as mentioned earlier, this has not happened in Latin America and in large parts of Asia.