Technological Advance, Trade and Welfare Reduction

One trend happening in East Asia is that the previous booming economies, notably Japan, Taiwan and Hong Kong, has lost momentum of high economic growth. For example, many people in Hong Kong have been frustrated with their situations. One observation is that many Hong Kong people are not happy with the interaction between mainland China and Hong Kong. This paper develops a simple 2-country, 2-good and 2-factor general equilibrium model between a small and a large economy. It shows that when a large economy experiences technological advance and upgrades its labor force, the small economy may be worse off compared with the pre-development of the large economy. This model shows that the higher technological development and human capital growth of a large but previously backward economy may lead to lower welfare of a smaller economy. It may partly explain the recent problems in Hong Kong, as well as Taiwan and Japan.