Specific Factors Model When Countries Have Different Technologies: Why Inefficient Industry is Better Than no Industry at All

One of the main questions of specific factors theory is whether it is possible to achieve a redistribution of gains from trade such that everybody in both trading countries win. This theory explicitly assumes that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that redistributes labor between the types of goods produced given the available capital. In this optimization problem both trade participants benefit from free trade, and it is possible to make everybody win. But if the two countries possess different technologies, the result is quite the opposite. The optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusions of the theory – the owners of export-oriented factor of production win and capital-abundant country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of free trade.