To integrate with a high- or low-wage country: That is the question |
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| Authors: | E Kwan Choi |
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| Institution: | 1. Institute of Game Behavior and Operations Management, Nanjing University of Finance and Economics, Nanjing 210046, China;2. School of Management Science and Engineering, Nanjing University, Nanjing 210093, China;3. Tuchman School of Management, New Jersey Institute of Technology, University Heights, Newark, NJ 07102, USA;1. Department of Management and Marketing, The University of Melbourne, 198 Berkeley Street, Carlton, Victoria 3010, Australia;2. College of Engineering, Mathematics and Physical Sciences, University of Exeter, North Park Road, Exeter EX4 4QF, England, United Kingdom;1. Michigan State University, Department of Agricultural, Food and Resource Economics, Justin S. Morrill Hall of Agriculture, 446 West Circle Dr., Rm 202, East Lansing, MI 48824 USA;2. Purdue University, Department of Agricultural Economics, 403 West State Street, Krannert Building, West Lafayette, IN 47907, USA;3. China Agricultural University Department of International Trade College of Economics & Management, No.17, Qinghua East Road, Haidian District, Beijing, 100083, PR China |
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| Abstract: | This paper considers the question of whether a country with the intermediate capital–labor ratio is better off forming a free trade area with the higher or lower wage country. Typical analyses of gains from trade ignore the effects of free trade on factor prices. When Europe forms a free trade area with a high-wage economy, the equalized wage rises and rent declines, while the price of the importable declines. Workers unambiguously benefit, but integration has an ambiguous effect on capitalists. However, consumers as a whole benefit from the integration and workers can more than offset the losses of the capitalists. On the other hand, Europe's integration with a low-wage economy raises rent but lowers the wage and the price of the labor-intensive good. Accordingly, capitalists unambiguously benefit, but integration has an ambiguous effect on workers. Again, welfare of all consumers rises and the capitalists can more than offset the losses of workers. |
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