International Trade's Impact on Income Inequality

Today, looking closely at the effects of globalization leaves one to wonder about the real impact international trade has on income inequalities. 

The Heckscher-Ohlin-Samuelson (HOS) theorem suggests that globalization is likely to reduce income inequality in developing countries. This theory suggests that since countries with a comparative advantage in the production of a good are well-endowed with capital, countries with less capital and unskilled labor should specialize in the production of goods requiring relatively little capital and unskilled labor. In countries like Asia and Africa, where unskilled labor is in higher demand, its wages are rising while skilled labor, which is less in demand, is expected to experience smaller wage increases. 

However, inequality is continuing to grow. One possible explanation behind this may be because capital, which is heavily concentrated in developed countries, benefits the most from the explosion in international trade. A small number of countries control all of the world's wealth, while capital acts as leverage on weaker ones. The purchase price of raw materials is an example of this issue.

If the selling price of cocoa, coffee, rubber, or cotton fairly remunerated the human capital invested in the production and if the producers had an equal share in the profits made by the sale, the issue of poverty could settle. 

But international trade doesn't just have drawbacks. Thanks to globalization and the development of new technologies, producers in developing countries have access to a more diversified offer. They are no longer limited to a select number of investors but can instead choose their clients and reduce the number of intermediaries. The old theories of international trade no longer hold. Another approach must take into account all the changes that have occurred in recent years and work to minimize the inequalities. 

Export Portal is a big supporter of fair global trade. Read our story to learn more about the efforts we make to facilitate a transparent system in the world of trading.