Low-wage competition: pains from trade for medium-wage countries

Lutz G. Arnold and Michael Heyna

The Journal of International Trade & Economic Development, 2022, vol. 31, issue 5, 742-758

Abstract: The entry of a low-wage country into a world economy with preexisting wage differentials puts the gains from trade in a former low-wage and then medium-wage country under pressure. If negotiations over the formation of a free trade area cover international transfers, there is a strong presumption that they bring about global free trade and compensation of the medium-wage country if necessary. In the absence of international transfers, by contrast, the medium-wage country is not compensated when global free trade causes a reduction in its gains from trade, and it may even happen that it is not part of the equilibrium free trade area.

Date: 2022
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DOI: 10.1080/09638199.2021.2016897

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