Trade- Practice and Theory Show Trade relationships Despite Theory and Ideologies that are suspicious of trade. Something s going on, and perhaps surprisingly most trade is between wealthy nations.
European Union Trade 8000000 7000000 6000000 5000000 4000000 United States China (excluding Hong Kong) Japan All countries of the world 3000000 2000000 1000000 0 1994a00 1996a00 2001a00 2006a00
Shares of World Trade European Union United States 16.1 17.3 China 9.6 Japan 6.7 Canada Hong Kong, China Korea, Republic of Mexico Singapore Taipei, Chinese India Malaysia Switzerland Saudi Arabia Australia 4.1 3.6 3.5 2.8 2.8 2.3 1.6 1.6 1.6 1.5 1.4 Other Members 17.5 0 5 10 15 20 25 30 35
HECKSHUR-OHLIN TRADE THEORY A nation will export the commodity whose production requires intensive use of relatively abundant and cheap factor and import the commodity that requires the intensive use of scarce or relatively expensive factors. Until the prices or factor costs are equal.
TRADE RELATIONSHIPS X $1000
ASSUMPTIONS BEHIND PURE THEORIES OF TRADE Costless Transactions Full Resource Employment Pareto distribution (side-payments to losers.) Similar Technology Constant Returns to Scale Similar tastes Costless Factor Movements (land labor capital.)
HECKSHUR-OHLIN TRADE THEORY Comparative Advantage Assumes Differential productivity of Labor Heckshur-Ohlin incorporates differential factor endowments and factor intensity in products. Factor endowments Workers or Relative productivity of Labor Capital Factor Intensity of Products more capital or labor or land intensive per unit to produce Portugal has more sunshine=grapes England more textile mills/ sheep
HECKSHUR-OHLIN TRADE THEORY Prediction one: Countries will focus on products whose input factors are relatively abundant within each country. Factor abundance can be measured in terms of relative factor prices, not simply ratio of availability. Similar to opportunity costs Factor prices are subject to competitive pressures. Demand for labor, or capital.
H-O FACTOR-PRICE EQUALIZATION Heckshur-Olin corollary International Trade will bring about equalizations in relative and absolute returns to homogenous factors across nations. Means factors, like wages will equalize for comparably productive workers. Also means returns to capital will tend to equalize across borders once the international markets are accessed. Creates race-to-the bottom arguments, Some room for competitive policies and externalizations of public bads.
HECKSHUR-OHLIN TRADE THEORY Trade acts as a substitute for mobility of other factors (labor, capital). Expectations of flows of other factors may also be demand driven. labor to high-wage capital to high interest or return countries. Factor reversals Leontief paradox Observed the US exported labor intensive goods, not capital as expected- despite being the most capital rich/ intensive country in the World. maybe only two factor model (not natural resources) Not inclusive of high human capital
HECKSHUR-OHLIN TRADE THEORY Leontief paradox drives Empirical Challenges to H-O, Stolper- Samuelson Increasing returns to scale maybe only two factor model (not natural resources) Not inclusive of high human capital/ heterogeneous labor Consumption/ demand driven production Role of transport costs Transaction costs exchange rate, contracts, information acquisition Assymetrical/expensive Information Path dependencies- Geographic economics eg.
RELAXING ASSUMPTIONS OF PURE THEORY OF TRADE Acquired Comparative Advantage: Means Comparative advantage is not just Given by Factor Endowments Economies of Scale Similar technologies Regulatory, or enforcement advantage Institutional Advantage Imperfect Competition
RELAXING ASSUMPTIONS: ACQUIRED COMPARATIVE ADVANTAGE Acquired Comparative Advantage Economies of Scale more efficient production for larger scale (capital intensive operations) Explains trade between similarly endowed countries. Is a central idea of gains from trade. Thought to be complementary to H-O and gains from trade. However, achievement of competitive scale for value-added sectors leads to some policy prescriptions Strategic Trade policies: Infant Industry Arguments subsidies Tariffs NTB
RELAXING ASSUMPTIONS: ACQUIRED COMPARATIVE ADVANTAGE Strategic Trade Policy Subsidy decision Yingli and Solarworld consider new solar technology and manufacturing Market will only support one new producer No Sub Costs Rewards SolarWorld 75 billion 50%100 billion Yingli 75 billion %50 100 billion With Sub SolarWorld Yingli Costs 75 billion 75 billion-25 subsidy 100 billion market 50%100 billion %50 100 billion
RELAXING ASSUMPTIONS: ACQUIRED COMPARATIVE ADVANTAGE AND INCREASING RETURNS Welfare loss to Tariffs or NTBs thought to be offset by public good of infant industry support ISI= Import substitution industrialization Import substitution industrialization also argued to create local economy of scale, and eventually knowledge to manufacture high value goods. Brazil and airplanes, automobiles Quotas Increasing Returns to Scale can create monopoly firms in single nation markets.
DIFFERENT TECHNOLOGIES Different technologies can alter efficiency, or change factor intensity of production. Advances in technology provide monopoly-like profits to leading firms. Substitution of labor for capital and vis-versa Elasticity of substitution: How easily labor can substitute for capital The costs of production may vary based on worker productivity. Human capital- multiplies the relative endowment effect of labor. More productivity per cost.
DIFFERENT TECHNOLOGIES Different technologies can alter efficiency, or change factor intensity of production. Advances in technology provide monopoly-like profits to leading firms. National Policies of Subsidy to technology intensive industries, or technology development behind trade barriers.