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THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 5

A vital corollary is that import restrictions cannot prevent factor-price convergence when capital markets are open. Since capital seeks out its most remunerative global use, trade restrictions provoke large-scale capital movements that equalize factor prices directly, and simultaneously eliminate the gains from commodity trade.

While the “great sucking sound” of firms relocating in low-wage countries has loomed prominently in the news media, aggregate investment patterns make it look implausible that the mechanism has so far had much impact on U.S. or European labor markets. The United States has been running substantial current account deficits since the mid-1970s; thus, the net effect of capital-market integration has been to allow the U.S. to invest more than it could have out of its own savings alone. To show that low-skilled American workers have been injured through the capital-flow channel, one would have to argue not that U.S. workers have been hurt by U.S. capital moving abroad, but rather that they have been hurt by foreign capital arriving here, perhaps because such workers’ services are highly substitutable for those of capital. In contrast, the European Union has on average run current account surpluses since the mid-1970s, but these have typically been 0.4 percent of GDP or less — much too small to explain the substantial rise in European unemployment over that time.