Low-Skill Products by High-Skill Workers: The Distributive Effects of Trade in Emerging and Developing Countries

• Published date: 01 September 2023
• DOI: http://doi.org/10.1177/00104140231152800
• Author: Irene Menéndez González,Erica Owen,Stefanie Walter
• Date: 01 September 2023
• Subject Matter: Articles

Article

Comparative Political Studies

2023, Vol. 56(11) 1724–1759

© The Author(s) 2023

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DOI: 10.1177/00104140231152800

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Low-Skill Products by

High-Skill Workers: The

Distributive Effects of

Trade in Emerging and

Developing Countries

Irene Men´

endez Gonz´

alez

1

, Erica Owen

2

, and

Stefanie Walter

3



Abstract

In developing countries, trade is increasingly associated with greater returns

to high-skilled labor and rising inequality. These empirical patterns are at odds

with canonical models of trade in the developing world. What does this mean

for the political economy of trade in these countries? We argue that although

developing countries have a comparative advantage in low-skill products,

these are produced by workers that are relatively high-skilled compared to

their peers. Trade and global production benef‌it relatively skilled workers,

particularly those exposed to exports and inward foreign direct investment in

manufacturing. Our argument offers insight into why relatively skilled workers

are most supportive of free trade and why inequality is rising in developing

countries. We examine micro- and macro-level implications of our argument

using cross-national survey data on policy preferences and aggregate data on

trade and inequality. The f‌indings have important implications for the political

economy of trade and global production in developing countries.

1

IE University, Madrid, Spain

2

University of Pittsburgh, Pittsburgh, PA, USA

3

University of Zurich, Zurich, Switzerland

Corresponding Author:

Irene Men´

endez Gonz´

alez, IE University, School of Global and Public Affairs, Paseo de la

Castellana 259, Madrid 28029, Spain.

Email: Irene.Menendez@ie.edu

Keywords

trade, inequality,preferences, politicaleconomy, distributive effects,developing

countries

Developing countries specialize in “low-skill”products.

1

This should benef‌it

low-skill workers relative to more skilled workers according to canonical

models of trade prominent in political economy, namely, the factoral model.

Instead, trade in these countries is associated with rising inequality, increasing

skill premiums, and more support for free trade by high-skill workers than

low-skill ones (for review, see Helpman, 2017;Pavcnik, 2017).

2

This raises

important questions for political science research. If developing countries

export low-skill-intensive products, why don’t low-skilled workers seem to

benef‌it from free trade as much as high-skilled workers? What is the impact of

these distributive pressures on developing country politics?

The answers to these questions have important implications for our un-

derstanding of issues as diverse as the causes and consequences of democ-

ratization, the evolution of inequality, and the politics of international trade.

Many theoretical arguments about the effects of trade (and globalization

generally) on developing country politics take the f‌inding that developing

countries have a comparative advantage in low-skilled products to imply that

the low-skilled disproportionally benef‌it from free trade, whereas high-skilled

labor and capital will be harmed, as implied by the factoral model. Examples

include the argument that democratization leads to trade liberalization in

developing countries because it empowers labor, for whom liberalization is

benef‌icial (Milner & Kubota, 2005), the argument that in labor-abundant

developing countries, left governments will be more likely to liberalize trade

because it benef‌its the majority of workers (Dutt & Mitra, 2005), or the

argument that when labor-abundant economies open themselves up for trade,

inequality decreases and democratization becomes more likely (Acemoglu &

Robinson, 2006;Boix, 2003).

Given the centrality of the assumption that trade disproportionately

benef‌its low-skill workers and reduces inequality in research on the political

economy of the developing world, the scant empirical evidence for the central

distributive implications of the factoral model is no trivial matter. This paper

aims at resolving this tension and providing a framework that allows us to

better understand the distributional effects of trade in developing countries.

We build a theory of the distributional effects of trade and global pro-

duction in developing countries by building on new developments in inter-

national economic theory. First, we draw on the generation of trade models

called “new new trade theory”or heterogeneous f‌irms theory (e.g., Melitz,

2003), in which more productive f‌irms are the ones that benef‌it from trade and

Men´

endez Gonz´

alez et al. 1725

foreign direct investment (FDI) and they hire more skilled or “high-quality”

workers (e.g., Bustos, 2011;Helpman et al., 2004,2010). These models

suggest that free trade and global production—especially exports and inward

FDI—benef‌it these workers, at the expense of those workers who are not able

to f‌ind jobs in productive, internationally competitive f‌irms (e.g., Palmtag

et al., 2020;Walter, 2017). Second, models of global production (Feenstra &

Hanson, 1996,1997) demonstrate that work that is moved offshore from the

North is low-skilled by Northern standards but high-skilled by the standards of

the host.

Both types of models imply that more skilled, well-educated workers

everywhere benef‌it more from exports and inward FDI than less-skilled, less-

educated workers. At the same time, what it means to be “high-skilled”will

vary across countries. Thus, it is necessary to distinguish between the global

(absolute) and the local (relative) skill distribution and to recognize that what

is considered “low-skilled”globally may be relatively high-skilled in certain

local contexts. Someone who has received more education than most other

people in a developing country context can be considered relatively high-

skilled in that country but may not necessarily be well-educated in a developed

country context. For example, someone who can read and write f‌luently may

be in the upper half of the education distribution in a less developed country,

but the same skill level, absent additional qualif‌ications, would put that person

in the lower tail of the distribution of educational attainment in a developed

country. We thus expect that exports and multinational activity benef‌it rel-

atively high-skilled workers compared to relatively low-skilled workers.

Weoffer evidence for two empirical implications of our argument. First, we

focus on the micro-level implications and examine individual trade attitudes.

Many studies f‌ind that high-skilled individuals in many, if not most, de-

veloping countries view trade and investment more positively than low-skilled

individuals (Ardanaz et al., 2013;Beaulieu et al., 2005;J¨

akel & Smolka, 2013;

Margalit, 2012;Mayda & Rodrik, 2005;Pandya, 2010;Rudra et al., 2021;

Urbatsch, 2013), which contradicts the predictions of the factoral model. We

contribute to this debate by using cross-national survey data from PEW (2002,

2007, 2014) to examine the effect of relative skill on income and preferences

regarding globalization. We f‌ind that consistent with our argument, relatively

skilled individuals earn higher incomes and are more supportive of trade and

global production, and that these effects are increasing in exposure to

manufacturing exports and greenf‌ield FDI.

3

Second, at the macro-level, we consider the implications of our theory for

the relationship between trade and inequality. Our theory suggests that

manufacturing exports will contribute to rising inequality. Using cross-

national data for 70 countries from 1960 to 2016, we demonstrate that

manufacturing exports contribute to greater inequality. The upward pressure

on inequality from trade in developing countries thus appears to operate

1726 Comparative Political Studies 56(11)