Low-Wage Competition: Pains From Trade for Medium-Wage Countries

Lutz G. Arnold and Michael Heyna

No 200, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: The entry of a low-wage country into a world economy with pre-existing 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 mediumwage 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.

Keywords: gains from trade; low-wage competition; North-South trade; free trade area; core; equality (search for similar items in EconPapers)
JEL-codes: F11 F61 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2020-12
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