A note on quantitative trade restrictions, income effects and wage inequality☆

a r t i c l e i n f o This paper examines the effects of conversion of one type of physical trade restrictions into another on the intra-country wage inequality in a standard 2 × 2 × 2 Heckscher–Ohlin–Samuelson model. It shows that a conversion of an import-quota into an equivalent voluntary export restraint raises wage-inequality in the country importing the unskilled-labor intensive good and lowers the wage-inequality in its trading partner. This result does not depend on whether the unskilled-labor intensive good or the skilled-labor intensive good was initially subject to an import quota. Conversion of the import-quota into an equivalent import tariff, on the other hand, may lead to a rise in wage inequality in both countries. The driving force behind these results is the real income effect that conversion of one type trade restriction instrument into another results in. This note examines the impact of conversion of import quotas into equivalent voluntary export restraints (VER) and into tariffs on the wage inequality. It offers an explanation for two-way (or global) rise in wage inequality in trading nations that has been observed over the last couple of decades. The effect of freer trade on income distribution within and across countries seems to have been settled once and for all since the publication of the two influential papers by Samuelson (1948) and Stolper and Samuelson (1941). The latter paper, and its subsequent variations [such as Jones (1971) and Mussa (1974)] had remained the connoisseur for providing clear directions to which within-country income distribution is expected to change when a country liberalizes its regime. But the empirical observations regarding symmetric changes in within-country wage inequality during the 1980s and 1990s almost across the globe contradicted its predictions. 1 It also posed a theoretical challenge to provide analytical framework that explains trade liberalization causing the rise in wage inequality in the developed and developing countries alike. There have been some recent theoretical attempts to generate Most of these papers consider changes in production specialization and consequently in the relative demand for skilled workers through either tariff reductions or capital inflow (or foreign direct investment). But the instruments and degree of trade liberalization have not been symmetric across the globe. There have been conversions of one type of physical restrictions into another such as the case of conversion of import quota into VER by USA and many other countries in …