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Low-Wage Competition: Pains From Trade for Medium-Wage Countries

Author

Listed:
  • Lutz G. Arnold
  • Michael Heyna

Abstract

The entry of a low-wage country into a world economy with pre-existing wage differentials puts the gains from trade in a former low-wage and then medium-wage country under pressure. If negotiations over the formation of a free trade area cover international transfers, there is a strong presumption that they bring about global free trade and compensation of the mediumwage country if necessary. In the absence of international transfers, by contrast, the medium-wage country is not compensated when global free trade causes a reduction in its gains from trade, and it may even happen that it is not part of the equilibrium free trade area.

Suggested Citation

  • Lutz G. Arnold & Michael Heyna, 2020. "Low-Wage Competition: Pains From Trade for Medium-Wage Countries," Working Papers 200, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:200_arnoldheyna
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    File URL: http://www.bgpe.de/texte/DP/200_Arnold_Lutz.pdf
    File Function: First version, 2020
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    More about this item

    Keywords

    gains from trade; low-wage competition; North-South trade; free trade area; core; equality;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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