Along with affecting the strength of centripetal and centrifugal forces, trade likely has a direct effect
on the location of economic activity. As long as inputs are not completely mobile, those regions
with a greater amount of inputs used in export production will presumably gain more from trade
than those regions who are endowed with inputs that most efficiently produce import-substituting
products. Assume that we have three inputs: land, skilled and unskilled labor, and three sectors,
skilled-intensive, unskilled-intensive, and non-traded. Further, assume that land is immobile, and
labor is not perfectly mobile.6 The standard Hecksher-Ohlin (H-O) model predicts that if Mexico has
an abundant supply of unskilled labor relative to its trading partners, the United States and Canada,
then it will export goods that are “unskilled-labor intensive”. Therefore the “unskilled-labor intensive”
goods industry will grow in Mexico and (mobile) unskilled labor in Mexico will benefit from higher
wages resulting from this increase in demand for their services. Further, one might anticipate that
regions with abundant unskilled labor will benefit more than other areas from trade with the United
States. Last, if the sector using the abundant input has increasing returns to scale, one might anticipate
trade to cause increasing agglomeration, despite the increasing conjestion costs and the decreased pull
of the domestic market