After the North American Free Trade Agreement (NAFTA) was signed, trade restrictions among Canada, the United States, and Mexico were eased and cross-border trade increased. What predictions would the Heckscher-Ohlin model make concerning output changes in labor-intensive industries such as textiles in both Mexico and the United States and in capital-intensive industries such as steel in both Mexico and the United States, as a result of NAFTA?
What will be an ideal response?
POSSIBLE RESPONSE: The Heckscher-Ohlin model predicts that free trade will allow countries to specialize in the production of goods that intensively use their relatively abundant factors of production. The Heckscher-Ohlin model would predict that after the trade restrictions are withdrawn, Mexico is likely to expand its production of textiles as they require intensive use of labor. The United States, on the other hand, will expand its production of steel, which is a capital-intensive industry, because it is a relatively capital-abundant country.
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