Trade, Technical Change, and Welfare

The domestic repercussions of trade liberalization have come under intense scrutiny in recent years. Trade liberalization and other aspects of globalization have been blamed for income inequality in the United States and unemployment in Europe. A key concern has been trade with low-wage developing countries. Although economists have studied the issue, no clear-cut answers have emerged. This paper examines some reasons for this ambiguity. Endogeneity and simultaneity can create major problems, causing trade to be blamed for developments that should properly be attributed to other factors. But even taken on its own, trade has ambiguous effects. It is only in the simplest Heckscher-Ohlin set-up that trade liberalization has the unequivocal outcome predicted by its critics.