International Trade - Theory and Policy, 2010a

First, consider the transition to equilibrium in the SF model. After the final adjustment depicted in the
immobile factor model, the wage rate paid to workers in the export industry is higher than the wage paid
in the import-competing industry. In the next step of the transition, workers (assumed to be the more
readily mobile factor) in the import-competing industry begin to seek ways to obtain a higher wage. This
might require additional education or training, or it may require workers to move to another geographical
area. In any case, the transition takes time. As workers begin to move across sectors, the supply of labor to
the export industry will rise. Profit-seeking firms in that sector will realize that they can temporarily raise
their profits by lowering their wage and hiring workers moving in from the other sector. Competition
among export firms will eventually lower the wage of all workers in the export industry. Competition
within the industry for the specific immobile capital will bid up the rental rate even further than in the
short run.
At the same time, the workers fleeing the import-competing sector will reduce the supply of labor there.
Import firms will bid among themselves for the remaining workers to maintain output and profit, which
will raise the wage paid to workers in this sector. With declining output, the demand for capital will fall,
causing an even further drop in the rental rate paid to capital owners.
When the final adjustment of labor across sectors is complete, the wage paid to workers in both industries
will be equal. Capital remains in its original sector, but changing prices and outputs affect its sectoral
demand. The rental rate paid to capital owners in the export industry will remain higher than that
obtained before trade liberalization and will increase relative to the short run. The rental rate for capital
owners in the import-competing sector will remain lower than that obtained before trade liberalization.
The magnification effect for prices in this model can be used to assess the real return to factors in the
medium-run equilibrium relative to the returns prior to trade liberalization. It shows that the real return
to capital owners in the export industry will rise with respect to purchases of both goods, while the real
return to capital in the import industry will fall with respect to purchases of both goods. Thus, as shown
inFigure 5.17 "Medium-Run Factor Income Effects of Trade Liberalization", capitalists in the export industry
gain and capitalists in the import industry lose.
Figure 5.17 Medium-Run Factor Income Effects of Trade Liberalization
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