A CRITICAL EVALUATION OF TRADE THEORIES

The validity of trade theories

Several studies have investigated the validity of the classical trade theories. The evidence collected by

0 10 20 30 40 50 60 70 80 90 100

0 10 20 30 40 50 60 70 80 90 100

100.00 (1) USA 1

86.547 (3) AUSTRALIA 2

84.123 (2) CANADA 3

72.872 (6) MALAYSIA 4

69.768 (4) GERMANY 5

69.283 (7) TAIWAN 6

66.489 (5) UNITED KINGDOM 7

66.407 (9) FRANCE 8

59.758 (8) SPAIN 9

58.416 (13) THAILAND 10

56.303 (11) JAPAN 11

50.813 (12) CHINA MAINLAND 12

47.787 SAO PAULO 13

47.354 ZHEJIANG 14

46.476 (10) KOREA 15

44.499 (20) COLOMBIA 16

44.310 (14) ITALY 17

43.877 (16) SOUTH AFRICA 18

42.507 MAHARASHTRA 19

42.181 (17) INDIA 20

40.667 (15) BRAZIL 21

37.851 (18) PHILIPPINES 22

33.636 ROMANIA 23

33.337 (19) MEXICO 24

29.803 (23) TURKEY 25

24.584 (21) RUSSIA 26

21.526 (22) POLAND 27

13.213 (25) INDONESIA 28

100.00 (2) FINLAND 1

98.159 (6) SINGAPORE 2

92.363 (4) DENMARK 3

90.311 (10) HONG KONG 4

89.730 (3) SWITZERLAND 5

88.683 (5) LUXEMBOURG 6

87.142 (7) SWEDEN 7

86.475 (1) NETHERLANDS 8

83.377 (11) ICELAND 9

82.579 (8) AUSTRIA 10

79.355 (9) IRELAND 11

75.761 (12) NORWAY 12

74.557 (13) BELGIUM 13

72.198 (14) NEW ZEALAND 14

67.003 ILE-DE-FRANCE 15

61.542 (15) CHILE 16

59.781 (16) ESTONIA 17

57.520 BAVARIA 18

56.060 RHONE-ALPS 19

52.243 CATALONIA 20

45.554 (19) CZECH REPUBLIC 21

43.567 (17) ISRAEL 22

42.463 (18) HUNGARY 23

41.391 LOMBARDY 24

35.174 (20) PORTUGAL 25

34.174 (21) GREECE 26

30.288 (23) SLOVAK REPUBLIC 27

12.464 (26) ARGENTINA 29

9.811 (24) VENEZUELA 30

29.170

27.768

(22) SLOVENIA 28

JORDAN 29

Figure 2.4 The world competitiveness scoreboard (larger nations), 2002 rankings are in brackets

Source: IMD World Competitiveness Yearbook 2003, 4.

Figure 2.5 The world competitiveness scoreboard (smaller nations), 2002 rankings are in brackets

Source: IMD World Competitiveness Yearbook 2003, 4.

MacDougall shortly after World War II showed that comparative cost was useful in explaining trade patterns.11 Other studies using different data and time periods have yielded results similar to MacDougall’s. Thus there is support for the claim that relative labor productivities determine trade patterns.

These positive results were subsequently ques- tioned. The studies conducted by Leontief revealed that the USA actually exports labor-intensive goods and imports capital-intensive products.12 These paradoxical findings are now called the Leontief Paradox. Thus, the findings are ambiguous, indi- cating that, in its simplest form, the Heckscher– Ohlin theory is not supported by the evidence.

In theory, the more different two countries are, the more they stand to gain by trading with each other.There is no reason why a country should want to trade with another that is a mirror image of itself. However, a look at world trade casts some doubt on the validity of classical trade theories. Developed

countries trade more among themselves than with developing countries. There is a tendency for cor- porations in developed countries to prefer to form direct-investment ties in the other more stable, developed countries while avoiding heavy invest- ment in the fast-growing developing world.

The trade pattern shown is surprising theoreti- cally, because advanced economies have similar climate and factor proportions and thus should not trade with one another since there are no compar- ative advantages. Apparently, other variables in addi- tion to factor endowment play a significant role in determining trade volume and practices because considerable trade does occur between developed nations.

Date: 2014-12-21; view: 1020