Table Of ContentGlobalisation, Comparative Advantage and
the Changing Dynamics of Trade
Contents
Globalisation, Comparative
Breaking through on trade: How a changing world dynamic affects policy
Part I. Is comparative advantage still relevant today? Advantage and the Changing
Chapter 1. Comparative advantage: The theory behind measurement
Chapter 2. Production, consumption and trade developments in the era of globalisation Dynamics of Trade
Chapter 3. Comparative advantage and export specialisation mobility
Chapter 4. Changing patterns of trade in processed agricultural products
Chapter 5. Have changes in factor endowments been refl ected in trade patterns?
Part II. What kind of policies support a dynamic comparative advantage?
Chapter 6. Comparative advantage and trade performance: Policy implications
Chapter 7. The role of intermediate inputs and equipment imports in dynamic gains from trade
Chapter 8. Determinants of diffusion and downstreaming of technology-intensive products in international trade
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Chapter 9. Intellectual property reform and productivity enhancement lo
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Chapter 10. The impact of export restrictions on raw materials on trade and global supply a
Chapter 11. Comparative advantage and structural change: Toward a complementary policy regime lis
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OECD (2011), Globalisation, Comparative Advantage and the Changing Dynamics of Trade, OECD Publishing. T
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Globalisation,
Comparative Advantage
and the Changing
Dynamics of Trade
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–3
FOREWORD
Foreword
The aftershocks of the 2008-2009 financial and economic crisis continue to shake the
world economy. While GDP, trade and investment have grown in each period since the
second quarter of 2009, growth rates have not returned to their pre-crisis levels. Perhaps
the most enduring impact of the crisis is the erosion of confidence in financial markets
and economic governance. Concerns persist regarding the long-term effects of the
extraordinary measures taken in response to the crisis, public debt sustainability, and
financial and property markets volatility. Unemployment across the OECD area remains
above 8% and youth unemployment is expected to reach 18% at the end of the 2011.
While the world economy remains weak, further policy options are limited: monetary
policy in most OECD countries has remained as expansionary as possible since the
advent of the crisis and fiscal policy is constrained by public sector debt levels. But
structural reforms, particularly those that can generate immediate employment gains
without significant government outlays, continue to hold promise. Trade policy, due to its
potentially powerful combination of supply and demand side impacts that go to the very
roots of economic activity, is one such structural policy. While neither trade nor trade
policy caused the crisis, they will need to be a part of the solution.
With rising globalisation, the dividing line between national and international policy
interventions is increasingly blurred. Some of the stimulus measures taken to rescue
sectors of systemic importance (such as banking), to preserve jobs (as in the automotive
industry), or to stimulate growth (such as sector-specific consumption tax reductions),
could become elements of “murky” protectionism and discriminate between domestic and
foreign goods or firms. Many governments remain actively involved in selected industries
that were particularly hard hit during the crisis. While extraordinary measures are
warranted during a crisis, they will over time distort markets, generate anti-competitive
impacts, invite retaliation, and, perversely, hurt productivity and growth. Such measures
are a high price to pay for supporting some economic sectors at the expense of others.
Adopting policies to facilitate structural adjustment during a crisis is one thing; using
them to artificially boost the price competitiveness of domestic products is quite another.
Embracing structural adjustment is necessary to ensure economies remain competitive
and generate employment opportunities into the future. Comparative advantage remains
the underlying principle that policy makers can place their faith in to guide economies
through this adjustment. The concept of comparative advantage posits that all economies
have trade opportunities to exploit and these opportunities stem from differences in factor
endowments between countries. As shown by the work in this volume, this continues to
be one of the most potent explanations of higher income growth in open economies.
Many developing countries have grown faster and become richer by allowing
structural change in response to the forces of comparative advantage. These countries will
continue to move up the value-added chain and expand jobs in their traded sectors. Over
the past decade, many developed countries experienced output growth, albeit at lower
GLOBALISATION, COMPARATIVE ADVANTAGE AND THE CHANGING DYNAMICS OF TRADE © OECD 2011
4 –
FOREWORD
levels, in both the traded and non-traded sectors. Employment growth has predominately
come from the non-traded sector, particularly services. But lower transportation costs,
new information technologies, and declining obstacles to foreign direct investment and
trade are transforming some non-tradeables into tradeables. Continuing to open markets
for both goods and services makes sound economic sense, whatever a country’s stage of
development.
But welfare-enhancing structural change requires that inefficient sectors contract in
order to allow for growth in more efficient areas. This reallocation can sometimes be
slow, difficult and potentially incomplete. Governments have an important role to play in
facilitating and expediting this process, as well as protecting the most vulnerable.
Properly designed economic, labour market, education and social policies can serve to
enhance the opportunities available to those who stand to gain from trade opening to
actually do so and to help those who are displaced to develop new skills and find new
opportunities.
Overall, the evidence provided in the book underscores what has been long known,
but not always relied upon in policy making. As David Ricardo argued two centuries ago,
it is the differences between countries, including differences in broad policy settings and
policy performance, that create relative differences in productivity and give rise to trade
and gains from trade. But product or sector-specific policies can undermine the gains
from trade. More than anything, this implies that trade openness and comparative
advantage-driven specialisation is not a constraint to economic development, but rather
its catalyst. Market opening and removal of remaining trade distortions, be it via
multilateral, regional, bilateral or unilateral approaches, should be among the key
structural policy initiatives considered for a balanced and sustained recovery.
Ken Ash
Director
Trade and Agriculture Directorate
GLOBALISATION, COMPARATIVE ADVANTAGE AND THE CHANGING DYNAMICS OF TRADE© OECD 2011
–5
TABLE OF CONTENTS
Table of contents
Foreword ..................................................................................................................................................... 3
Breaking through on trade: How a changing world dynamic affects policy
by Przemyslaw Kowalski and Susan F. Stone ......................................................................................... 9
Integration of industrialised and emerging economies has shaped globalisation .................................. 10
The concept of comparative advantage has been pivotal to studying this change ................................ 11
Is comparative advantage still relevant today? What do the patterns of trade tell us? .......................... 12
What kind of policies support a dynamic comparative advantage? ...................................................... 15
Conclusions ........................................................................................................................................... 21
References ............................................................................................................................................. 23
Part I. Is comparative advantage still relevant today? ....................................................................... 25
Chapter 1. Comparative advantage: The theory behind measurement
by Alan V. Deardorff ............................................................................................................................. 27
The Ricardian trade model .................................................................................................................... 28
A variable-cost trade model .................................................................................................................. 30
Measuring comparative advantage ........................................................................................................ 31
Conclusions ........................................................................................................................................... 36
References ............................................................................................................................................. 38
Chapter 2. Production, consumption and trade developments in the era of globalisation
by Przemyslaw Kowalski and Ricardo H. Cavazos Cepeda .................................................................. 41
Globalisation, trade, FDI and growth developments ............................................................................. 42
Overview of production, employment and consumption developments in OECD countries ................ 46
Selected trade developments ................................................................................................................. 57
Conclusions ........................................................................................................................................... 65
References ............................................................................................................................................. 68
Annex 2.A. Figures ............................................................................................................................... 69
Chapter 3. Comparative advantage and export specialisation mobility
by Przemyslaw Kowalski and Novella Bottini ...................................................................................... 81
Comparative advantage hypothesis and economic policy ..................................................................... 83
Measurement of comparative advantage and meaning of RCA indices ................................................ 85
Overview of export specialisation patterns by broad sector .................................................................. 88
Dynamics of specialisation at the product level .................................................................................... 90
Conclusions ......................................................................................................................................... 105
References ........................................................................................................................................... 109
Annex 3.A. Country trade shares and RCA indices ........................................................................... 112
Annex 3.B. Mobility indices .............................................................................................................. 113
Annex 3.C. Figures and tables............................................................................................................ 114
GLOBALISATION, COMPARATIVE ADVANTAGE AND THE CHANGING DYNAMICS OF TRADE © OECD 2011
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TABLE OF CONTENTS
Chapter 4. Changing patterns of trade in processed agricultural products
by Peter S. Liapis ................................................................................................................................. 121
What agricultural products are considered processed? ....................................................................... 123
Data ..................................................................................................................................................... 123
Trends in trade and production ............................................................................................................ 124
Revealed comparative advantage and growth ..................................................................................... 131
Conclusions ......................................................................................................................................... 146
References ........................................................................................................................................... 148
Chapter 5. Have changes in factor endowments been reflected in trade patterns?
by Susan F. Stone, Ricardo H. Cavazos Cepeda and Anna Jankowska ............................................... 151
The Heckscher-Ohlin theory of international trade ............................................................................. 152
Trends in factor endowments .............................................................................................................. 153
Measuring factor content ..................................................................................................................... 161
Ranking factor content ........................................................................................................................ 163
Conclusions ......................................................................................................................................... 183
References ........................................................................................................................................... 187
Annex 5.A. Data details ...................................................................................................................... 189
Part II. What kind of policies support a dynamic comparative advantage? .................................. 195
Chapter 6. Comparative advantage and trade performance: Policy implications
by Przemyslaw Kowalski ..................................................................................................................... 197
Sources of comparative advantage ...................................................................................................... 198
Empirical methodology ....................................................................................................................... 199
Results ................................................................................................................................................. 206
Conclusions ......................................................................................................................................... 215
References ........................................................................................................................................... 220
Annex 6.A Details of data .................................................................................................................. 222
Annex 6.B. Table and figures ............................................................................................................. 224
Chapter 7. The role of intermediate inputs and equipment imports in dynamic gains from trade
by Susan F. Stone and Ben Shepherd ................................................................................................... 233
What do we know about dynamic gains? ............................................................................................ 235
Measuring the dynamic effects: Methodology and data ...................................................................... 239
Results ................................................................................................................................................. 241
Conclusions ......................................................................................................................................... 253
References ........................................................................................................................................... 257
Chapter 8. Determinants of diffusion and downstreaming of technology-intensive
products in international trade
by Lauren Deason and Michael J. Ferrantino ...................................................................................... 261
Background ......................................................................................................................................... 263
Empirical strategy and data description .............................................................................................. 265
Stylized facts and anomalies ............................................................................................................... 267
Conclusions ......................................................................................................................................... 277
References ........................................................................................................................................... 281
Annex 8.A. Tables ............................................................................................................................... 284
GLOBALISATION, COMPARATIVE ADVANTAGE AND THE CHANGING DYNAMICS OF TRADE© OECD 2011
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TABLE OF CONTENTS
Chapter 9. Intellectual property reform and productivity enhancement
by Ricardo H. Cavazos Cepeda and Douglas C. Lippoldt ................................................................... 295
Motivation ........................................................................................................................................... 296
Literature review ................................................................................................................................. 297
Summary ............................................................................................................................................. 299
Analytical approach and data .............................................................................................................. 300
Results ................................................................................................................................................. 302
Conclusions ......................................................................................................................................... 303
References ........................................................................................................................................... 307
Annex 9.A. Figures and tables ........................................................................................................... 309
Chapter 10. The impact of export restrictions on raw materials on trade and global supply
by Frank van Tongeren ........................................................................................................................ 317
The what, why and who in export restrictions .................................................................................... 319
Economic effects of export restrictions ............................................................................................... 324
The inefficiency and ineffectiveness of export restrictions ................................................................. 326
Conclusions ......................................................................................................................................... 328
References ........................................................................................................................................... 330
Chapter 11. Comparative advantage and structural change: Toward a complementary policy regime
by Peter A. Petri and Michael G. Plummer .......................................................................................... 333
Comparative advantage and structural change .................................................................................... 335
Complementary trade and structural policies ...................................................................................... 337
Trade liberalization strategies ............................................................................................................. 339
Structural change strategies ................................................................................................................. 341
Conclusions ......................................................................................................................................... 343
References ........................................................................................................................................... 346
GLOBALISATION, COMPARATIVE ADVANTAGE AND THE CHANGING DYNAMICS OF TRADE © OECD 2011
