Permalink : http://hdl.handle.net/2115/14863

KEYWORDS : Tariff protection;Trade pattern reversal;Wage inequality;Factor price equalization

This simple paper analyzes trade between a competitive country and a monopoly country in a sector-specific factors model. It is shown that the wage rate rises in the competitive country while both wages and profits fall in the monopoly country when trade is opened up. Workers and the monopoly firm in the latter country may lobby for protection, which causes price discrimination and trade pattern reversal. In contrast to conventional wisdom, factor prices are not equalized under free trade but equalized under price discrimination and dumping caused by a high-tariff. (JEL F11, F12, F13)