Preferential Trading and Real Wages

Abstract:     
Following the Stolper-Samuelson type of logic, the general impression is that freeing up trade, whether preferentially as in the North American Free Trade Agreement (NAFTA) or on a nondiscriminatory basis as in the Uruguay Round, must lower real wages in one set of countries and raise them in the other set of countries. This paper shows that even within a standard three-country, three-good, small-union model, preferential trade liberalization can lead to increased real wages in both partner countries without necessarily relying on terms of trade improvements, increasing returns, complete specialization, or asymmetries in production technology.

JEL Classification: F14, J31

Accepted Paper Series