Working Paper, Department of Economics, Johannes Kepler University of Linz 0012
This article contributes to a clear understanding of important aspects of economic globalization. Specifically, we want to highlight the distributional concerns and how these are related to efficiency aspects of globalization. To this end, we identify relevant scenarios within a simple model of international trade featuring two groups of households who differ in both preferences and sector specific endowments. We address two kinds of scenarios which appear particularly topical: An abolition of agricultural protection, and an increase in import competition from low wage coutnries. All scenarios considered have severe redistributive consequences which our model identifies as a real income loss or gain, respectively, for one of the two groups of households. But, absent further distortions, a liberalization scenario will also feature an efficiency gain which implies that any real income loss may be fully compensated for by means of direct transfer payments. Globalization scenarios may, however, also entail a real income loss for the economy as a whole if they entail a deterioration of the terms-of-trade. In such a case, redistributive consequences may not be fully undone by means of compensation payments. A fortiori, then, full compensation cannot be achieved through trade restrictions either. Globlization scenarios may thus entail, not only distributional consequences, but also an aggregate welfare loss for an individual country. But responding with trade restrictions will aggravate the problem by inflicting a further real income loss on such a country. Efficienca gains may be jeopardized by rigid vactor prices and adverse incentives from compensation payments.