Alan V. Deardorff

Chapter 10 Testing trade theories and predicting trade flows

Publisher Summary The major obstacle to the testing of trade theories has been the difficulty of constructing tests that is theoretically sound. The intuitive content of most trade theories is quite simple and straightforward. But empirical tests of the theories are often faulted on the grounds that they test propositions that do not derive rigorously from the theories. The problem seems to lie in the theories themselves, which are seldom stated in forms that are compatible with the real world complexities that empirical research cannot escape. This chapter discusses the problems that arise in testing trade theories independent of the theory being tested. To the extent that many of the specific explanations of trade have a common foundation in the theory of comparative advantage, they also share some of the same empirical complications, and it is useful to look at these before becoming immersed in the particular problems that arise from specific theories. The chapter reviews the empirical tests and implementations of the Ricardian theory, the Heckscher–Ohlin theory, and the technology theory. The chapter also reviews an assortment of other approaches to trade. These include both recently articulated theories that have not yet been tested, such as the monopolistic competition model, and empirical tests that have been done without benefit of theory, such as the so-called gravity models.

Trade and Jobs in U.S. Manufacturing

DURING THE PAST 15 years, the U.S. economy has become increasingly integrated with the rest of the world. Among other trends, imports and exports have risen significantly as a percentage of U.S. gross domestic product. Many manufacturing sectors have shrunk in the face of stiff international competition; others have grown in response to strong international demands for U.S. exports. One of the notable features of this internationalization is the growing importance of trade with the developing countries. In 1978, developing countries accounted for 29.0 percent of U.S. manufactured goods imports. By 1990, that ratio had risen to 36.4 percent. Seven countries in East Asia (China, Hong Kong, Korea, Malaysia, Singapore, Taiwan, and Thailand), together with Brazil and Mexico, accounted for 79 percent of the increase in U.S. trade with all developing countries between 1978 and 1990. Many observers have linked the growing internationalization of the U.S. economy to important rends in the U.S. labor market. Three labor

Welfare Effects of Global Patent Protection

This paper uses a simple model of invention and patent protection to examine the welfare effects of extending patent protection from the country where invention takes place to another country that is only a consumer of invented products. It is shown that, while the welfare of the inventing country certainly rises with the extension of patent protection, that of the other country probably falls, and may well fall by more than the increase in welfare of the inventing country. In particular, as patent protection is extended to a larger and larger portion of the world, the effect on the welfare of the world as a whole of extending it to the rest of the world becomes negative. Copyright 1992 by The London School of Economics and Political Science.

Estimates of the elasticities of substitution between imports and home goods for the United States: Reply

SchAtzungen der SubstitutionselastizitAt zwischen Importen und heimischen Gutern fur die Vereinigten Staaten. - Dieser Aufsatz enthAlt SchAtzungen der Importnachfrage- und SubstitutionselastizitAten fur 122 dreistellige SIC-Industrien der USA, wobei jAhrliche Daten der Periode 1962–1978 und eine Variante der zweistufigen Methode der kleinsten Quadrate benutzt werden. SchAtzungen aufgrund einer Variante der dreistufigen Methode der kleinsten Quadrate, die simultan fur eine Untergruppe dieser Industrien vorgenommen werden, liefern einige Hinweise auf eine Korrelation der Residuen aus den Importfunktionen fur die verschiedenen Industriezweige. Obwohl auch sie mit Ungenauigkeiten behaftet sind, bieten die geschAtzten ElastizitAten doch einen wertvollen Anhaltspunkt fur einzelne Industrien und fur die Wahl von Parametern in Computermodellen und anderen Analysen des Au\enhandels mit hoher Disaggregation.

International Provision of Trade Services, Trade, and Fragmentation

The author examines the special role that trade liberalization in services industries can play in stimulating trade in both services, and goods. International trade in goods requires inputs from such trade services as transportation, insurance, and finance, for example. Restrictions on services across borders, and within foreign countries add costs, and barriers to international trade. Liberalizing trade in services could also facilitate trade in goods, providing more benefits than one might expect from analysis merely of the services trade. To emphasize the point, the author notes that the benefits for trade are arguably enhanced by the phenomenon of fragmentation. The more that production processes become split across locations, with the fragments tied together, and coordinated by various trade services, the greater the gains from reductions in the costs of services. The incentives for such fragmentation can be greater across countries, than within countries, because of the greater differences in factor prices, and technologies. But the service costs of international fragmentation can also be larger, especially if regulations, and restrictions impede the international provision of services. As a result, trade liberalization in services can stimulate the fragmentation of production of both goods, and services, thus increasing international trade, and the gains from trade even further. Since fragmentation seems to characterize an increasing portion of world specialization, the importance of service liberalization is growing apace.

The General Validity of the Law of Comparative Advantage

It is well known that the law of comparative advantage breaks down when applied to individual commodities or pairs of commodities in a many-commodity world. This paper shows that the law is nonetheless valid if restated in terms of averages across all commodities. Specifically, a theorem and several corollaries are derived which establish correlations between vectors of trade and vectors containing relative-autarky-price measures of comparative advantage. These results are proven in a general many-commodity model that allows for tariffs, transport costs, and other impediments to trade.

Weak links in the chain of comparative advantage

Abstract This paper examines the proposition that trade in many commodities can be explained by a chain of comparative advantage. It is first shown, in a two-country, two-factor model, that trade accords with the ranking of goods by factor intensity if there are unequal factor prices, free trade, and only final goods. This result continues to hold if either trade impediments or intermediate products are introduced. However, if both are present, the chain proposition breaks down. Finally, with many countries, it is shown that trade impediments alone can invalidate the chain proposition.

Measurement of Non-Tariff Barriers

For governments, the advantage of non-tariff barriers (NTBs) to trade is that their effects are more certain than for tariffs. Now that tariff barriers have been substantially reduced, there has been increasing interest in the ways that non-tariff barriers (NTBs) may distort and restrict international trade. This working paper assesses currently available methods for quantifying NTBs. Calculation of the tariff equivalent of a given NTB for a given economic indicator is complex, and requires a great deal of information. Measures that are equivalent for one indicator will not be so for others, and there is no substitute for NTB-specific expertise ... Barrieres non tarifaires L’avantage, pour les gouvernements, des barrieres non tarifaires au commerce (BNT), est que leurs effets sont plus certains que ceux des droits de douane. Les manieres dont les BNT peuvent entrainer un effet de distorsion et de restriction du commerce international suscitent un interet croissant depuis la reduction substantielle des barrieres tarifaires. Ce document de travail analyse les methodes actuellement disponibles qui permettent d’evaluer quantitativement les BNT. Le calcul du droit de douane equivalent a une BNT donnee, pour un indicateur economique donne, est complexe et necessite un grand nombre d’information. Des mesures equivalentes pour un indicateur ne le seront pas pour d’autres, et rien ne peut remplacer les connaissances techniques d’un type specifique de BNT ...

Local Comparative Advantage: Trade Costs and the Pattern of Trade

When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country’s costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the law of comparative advantage, first in a Ricardian model with trade costs, then extending a 1980 result due to Deardorff and to Dixit and Norman to include trade costs explicitly in a general framework. It uses this latter result to derive two correlations relating trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, the paper examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country’s costs of both production and trade relative to an index of those costs for other countries.

The possibility of factor price equalization, revisited

This paper derives a condition for factor price equalization (FPE) in a Heckscher-Ohlin model with many goods, factors, and countries. Using Dixit and Norman’s integrated world economy (IWE), two sets, called lenses, are constructed: one spanned by the factor vectors used to produce goods in the IWE; the other spanned by the countries’ factor endowments. If the factorendowment lens ever passes outside the factor-use lens, then FPE is impossible. In this sense, therefore, FPE requires that factor endowments vary less across countries than factor intensities vary across industries.