Discussion

Summary

Ever since Mundell's (1957) path-breaking contribution, economists are accustomed to thinking that trade liberalisation reduces the incentive for factor mobility. The notion that trade and factor flows are substitutes has widely percolated outside the economics profession. For instance, politicians in the European Union (EU) and in the United States (USA) have embraced regional trade liberalisation largely on the assumption that increased trade would reduce the incentive for immigration of labour from their poorer regional partners.

Mundell's intuitive result rests crucially on two neo-classical assumptions. First, trade conforms to the Heckscher–Ohlin (HO) model, which implies, inter alia, that trade liberalisation tends to equalise factor rewards across countries. Second, international factor mobility is solely a function of differences in international factor prices. Therefore, provided that it achieves full factor-price equalisation, free trade completely eliminates the incentive for factor mobility.

Over the past 15 years, a number of contributions have investigated the impact of alternative trade models on the relationship between trade liberalisation and factor mobility. Chapter 2 by Tony Venables, who is himself one of the contributors in this field, provides a splendid overview of this recent literature. The chapter considers two alternatives to the HO workhorse: the Ricardo–Viner (RV) specific-factors model, and the Helpman–Krugman (HK) imperfect-competition model. Using a unified approach encompassing all three models, Venables shows that the Mundellian result does not necessarily carry through to the other two models.