Trade Liberalization and Labor Unions

The present note builds a two-country model of Cournot oligopoly with country-specific labor unions. The impact of trade liberalization on wages and its consequent impact on union behavior and trade patterns are examined. We show that the union with relatively fewer number of firms will face the stronger pressure for wage moderation when trade is liberalized. We use this result to construct a simple example in which a country with higher autarky price becomes a net exporter of that good. We also discuss that our results are critically dependent on the mode of competition between firms.