Lecture 5 - The Heckscher-Ohlin Model

Lecture 5 The Heckscher-Ohlin Model Empirical Evidence 1 1. Empirical evidence on H-O (and its extensions) 2. Changing patterns of comparative advantage 3. Institutional quality and comparative advantage 4. H-O, trade and inequality...

Lecture 5 The Heckscher-Ohlin Model Empirical Evidence 1 1. Empirical evidence on H-O (and its extensions) 2. Changing patterns of comparative advantage 3. Institutional quality and comparative advantage 4. H-O, trade and inequality 2 The 4 theorems 1. An increase in the relative price of a good causes the remuneration of the factor used intensively in the production of that good to increase, while the remuneration of other factors of production decrease (Stolper Samuelson theorem). 2. If output prices remain constant as the amount of a factor of production increases, then the supply of the good that uses this factor intensively increases, and the supply of the other good decreases (Rybczynski theorem). 3 The 4 theorems 3. An economy exports goods that are relatively intensive in its relatively abundant factors of production and imports goods that are relatively intensive in its relatively scarce factors of production (HO theorem). 4. Free trade equalizes relative factor prices: w/r=w*/r* 4 Empirical Evidence on the Heckscher-Ohlin Model Leontief (1953) found that U.S. exports were less capital- intensive than U.S. imports, even though the U.S. is the most capital-abundant country in the world: Leontief paradox. 5 Empirical Evidence on the Heckscher-Ohlin Model Possible explanations of Leontief paradox:  Paradox specific to the time period considered  US have an advantage in producing high tech goods which are skilled labor intensive rather than K-intensive 6 Empirical Evidence on the Heckscher-Ohlin Model Bowen, Leamer, and Sveikauskas (1987) tested the Heckscher-Ohlin model on data from 27 countries Based on the factor content of imports and exports, a ‫ﺧﺎﻟص‬ country should be a net exporter of a factor of production with which it is relatively more endowed ‫ ﺻﺎﺣب‬, ‫ﺑرﺧوردار‬ 7 Testing the Heckscher-Ohlin Model They find poor evidence in support of HO model 8  ‫‪Empirical Evidence of the‬‬ ‫‪Heckscher-Ohlin Model‬‬ ‫‪‬‬ ‫‪Evidence on changes in patterns of exports between‬‬ ‫‪developed (high income) and developing (low/middle‬‬ ‫‪income) countries supports the theory:‬‬ ‫‪‬‬ ‫‪US imports from Bangladesh are highest in low-skill-intensity‬‬ ‫‪industries‬‬ ‫‪‬‬ ‫‪US imports from Germany are highest in high- skill-intensity‬‬ ‫‪industries.‬‬ ‫‪ (High-Skill):‬ﮐﺷورھﺎی ﺑﺎ ﻧﯾروی ﮐﺎر ﻣﺎھر‬ ‫‪،‬ﮐﺷورھﺎﯾﯽ ﮐﮫ ﻧﯾروی ﮐﺎر ﺗﺣﺻﯾﻠﮑرده و ﺑﺎ ﻣﮭﺎرت ﺑﺎﻻ دارﻧد )ﻣﺛل آﻟﻣﺎن‪ ،‬آﻣرﯾﮑﺎ‪ ،‬ژاﭘن(‪ ،‬در توﻟﯾد ﮐﺎﻻھﺎی ﭘﯾﭼﯾده و ﻓﻧﺎورﯾﺑر )ﻣﺎﻧﻧد ﻣﺎﺷﯾﻧﺂﻻت‬ ‫‪.‬ﻧرﻣﺎﻓزار‪ ،‬ﺗﺟﮭﯾزات ﭘزﺷﮑﯽ( ﻣزﯾت ﻧﺳﺑﯽ دارﻧد و اﯾن ﮐﺎﻻھﺎ را ﺻﺎدر ﻣﯾﮑﻧﻧد‬ ‫‪ (Low-Skill):‬ﮐﺷورھﺎی ﺑﺎ ﻧﯾروی ﮐﺎر ﮐم ﻣﮭﺎرت 🔹‬ ‫ﮐﺷورھﺎﯾﯽ ﮐﮫ ﻧﯾروی ﮐﺎر ارزان و ﮐﻣﻣﮭﺎرت دارﻧد )ﻣﺛل ﺑﻧﮕﻼدش‪ ،‬وﯾﺗﻧﺎم(‪ ،‬در ﺗوﻟﯾد ﮐﺎﻻھﺎی ﺳﺎده و ﮐﺎرﺑر )ﻣﺎﻧﻧد ﭘوﺷﺎک‪ ،‬اﺳﺑﺎﺑﺑﺎزی‪ ،‬ﻣﺣﺻوﻻت‬ ‫‪.‬ﮐﺷﺎورزی( ﻣزﯾت ﻧﺳﺑﯽ دارﻧد و اﯾن ﮐﺎﻻھﺎ را ﺻﺎدر ﻣﯾﮑﻧﻧد‬ ‫‪9‬‬  ‫‪Skill Intensity and the Pattern of U.S.‬‬ ‫در ﻣﺣور اﻓﻘﯽ‬ ‫‪Imports‬‬ ‫ﻧﻣودار ﺷدت ﻣﮭﺎرت‬ ‫ﺻﻧﻌت و در ﻣﺣور‬ ‫ﻋﻣودی آن درﺻد‬ ‫ﺗﺧﻣﯾﻧﯽ واردات‬ ‫اﻣرﯾﮑﺎ ﻧﺷﺎن داده‬ ‫ﺷده اﺳت‪.‬ھﻣﺎﻧطور‬ ‫ﮐﮫ در ﻧﻣودار دﯾده‬ ‫ﻣﯽ ﺷود روﻧد‬ ‫واردات از آﻟﻣﺎن ﺑﺎ‬ ‫اﻓزاﯾش ﺷدت‬ ‫ﻣﮭﺎرت ﺑﯾﺷﺗر ﺷده‬ ‫و از ﺑﻧﮕﻼدش ﮐﻣﺗر‬ ‫‪.‬ﺷده اﺳت‬ ‫”‪Source: Romalis “Factor Proportions and the Structure of Commodity Trade,‬‬ ‫)‪American Economic Review 94 (2004‬‬ ‫‪10‬‬  ‫ﺷدت ﻋﺎﻣل‬ Factor intensities (Romalis, 2004) 11 Empirical Evidence of the Heckscher-Ohlin Model As Japan and the four Asian “miracle” countries (Singapore, Hong Kong, Taiwan and Korea) became more skill-abundant, U.S. imports from these countries shifted from less skill-intensive industries toward more skill-intensive industries. 12 Changing Patterns of Comparative Advantage 13 ‫‪Changing Patterns of Comparative‬‬ ‫‪Advantage‬‬ ‫ﻧﻘطﮫ ﭼﯾن )ﺳﺎل‬ ‫اﯾن ‪1998):‬‬ ‫ﻧﻘطﮫ ﺧﯾﻠﯽ‬ ‫ﻣﮭﻣﮫ! ﻧﺷون‬ ‫ﻣﯾده ﮐﮫ ﺗو اﯾن‬ ‫ﺳﺎل‪ ،‬ﭼﮫ ﺗﻐﯾﯾری‬ ‫ﺗو اﻟﮕوھﺎ اﺗﻔﺎق‬ ‫اﻓﺗﺎده‪.‬ﻣﺛﻼً‬ ‫ﻣﻣﮑﻧﮫ ﻧﺷون ﺑده‬ ‫ﮐﮫ ﺑﻌد از اﯾن‬ ‫ﺳﺎل‪ ،‬ﺳﮭم‬ ‫واردات از ﯾﮫ‬ ‫ﮐﺷوری ﺗو ﯾﮫ‬ ‫ﺻﻧﻌت ﺧﺎص‬ ‫ﺧﯾﻠﯽ ﺑﯾﺷﺗر ﯾﺎ‬ ‫‪.‬ﺧﯾﻠﯽ ﮐﻣﺗر ﺷده‬ ‫‪14‬‬ Changing Patterns of Specialization Source: UNIDO, Industrial Development Report 2013 15 Changing Patterns of Trade From 1980 to 1993 global trade grew at about 4.7% per year on average, or a bit more than the 3% rate of global growth. Between 1994 and 2007, trade grew at almost‫ﮔرﻓﺗن‬twice the ‫ اوج‬, ‫ﺻﻌود ﮐردن‬ rate that the world economy did. Goods exports soared to about a quarter of global GDP. The lion’s share of this growth was due to China:  During this phase of what Arvind Subramanian and Martin Kessler, of the Peterson Institute for International Economics, call “hyperglobalisation”, China’s trade became so important that it was critical not just to its own economy but to that of the world as a whole. The only previous economy of which that could be said was 19th-century Britain’s. 16  Changing Patterns of Trade Two main factors contributed to this transformation in global trade: Two broad factors drove that change: 1. Years of trade liberalisation culminatedWTO in the establishment of the World Trade Organisation in 1995, China’s accession to the WTO in 2001 marked a with China acceding to it in 2001 crucial moment in its integration into the global trading system. 2. Technological improvements made possible longer and more complex supply chains:  By the 1990s container shipping had made transporting goods around the world easier and, and the new ports needed to add trade capacity could be built quickly and easily.  Better communications, and the development of computer-based design technologies that allowed precise details of components to be easily sent from place to place 17 Changing Patterns of Trade Cheaper and easier international trade allowed supply chains to expand globally. This allowed for a much faster pace of catch-up. Where Japan and South Korea needed to build industrial ‫ﭘﺎﯾﮫ‬ and technological‫دوﻧدﮔﺎن‬ capabilities from the ground up, ‫ﻋرﺿﮫ‬ more recent sprinters needed little more than a supply of cheap labour and the regulations and infrastructure required to move products quickly in and out of factory towns. 18  19 Source: Bruegel 2017 New trends in global R&D expenditure 20  Made in China 2025 ‫ﺑرﺟﺳﺗﮫ‬ In 2015 China launched a plan to become a leading global technological superpower by 2049. ‫ﺣزب‬ ‫دوﻟت‬ ‫)رھﺑر ﺣزب و دوﻟت( رھﺑر‬ Party and state leader Xi Jinping himself made the strategy “Made in China 2025” (MIC25) his signature project, reflecting how crucial it is to China’s future development. The strategy defines ten core industries in which China wants to achieve major breakthroughs and create globally competitive ‫ﭘﯾﺷرﻓت ھﺎ‬ companies. 21  Made in China 2025 ‫ﺣﻣﺎﯾت ھﺎی‬ Backed by industrial policy, massive financing, and subsidies in the hundreds of billions of US dollars, both state and private companies aim to build the technological foundations of the ‫ﺗﺟدﯾد ﺣﯾﺎت‬ “China Dream,” a revitalization of the nation the Chinese ‫ﺑﮫ ﺷدت‬ Communist Party (CCP) has been promoting vigorously under Xi ahead of two important centenaries.  For the party’s 100th birthday in 2021, China aims to become a moderately prosperous nation ‫ﻣﻠﺗﯽ ﻧﺳﺑﺗﺎ ﻣرﻓﮫ‬  For the 100th anniversary of the People’s Republic of China in 2049, it aspires to become a “global manufacturing”, “cyber”, and “science and technology innovation superpower”. In Western industrialized countries, China’s ambition has caused considerable irritation. China has responded to this criticism from abroad by toning down its references to the plan. ‫ﮐﺎھش دادن ارﺟﺎﻋﺎت‬ 22  23 Source: Merics (2019) Evolving made in China 2025 Institutional quality and comparative advantage Complex goods require a large number of contracts to be produced. Complex goods rely more on the level of contract enforcement of their country than simple goods Enforcement of contracts is guaranteed by the judicial system of a country. ⇒ good institutions are a source of comparative advantage in the production of complex goods. 24 25 Source: ICE Report 2019 How do we measure institutional quality? ‫ﺷﺎﺧص ﺣﺎﮐﻣﯾت ﺟﮭﺎﻧﯽ‬ Worldwide Governance Indicators, WB:  Voice and Accountability  Political Stability and Absence of Violence  Government Effectiveness ‫ﺻدای ﻣردم و ﻣﺳﺋوﻟﯾﺗﭘذﯾری‬ ‫ﺛﺑﺎت ﺳﯾﺎﺳﯽ و ﻋدم ﺧﺷوﻧت‬  Regulatory Burden ‫ﮐﺎرآﻣدی دوﻟت‬ ‫ﺑﺎر ﻣﻘرراﺗﯽ‬  Rule of Law ‫ﺣﺎﮐﻣﯾت ﻗﺎﻧون‬ ‫ﮐﻧﺗرل ﻓﺳﺎد‬  Control of Corruption 26 27 28 29 Contract intensity of industries (Nunn, 2007) 30 Nunn (2007) QJE New trends in global R&D expenditure The dependent variable is total exports in industry i from country c to all other countries in the world 31  Chor (2010) Dep var: bilateral industry trade flows FINDEV=ratio of private credit to GDP in the economy CAPDEP=measure of industry dependence on external finance (Rajan Zingales 1998) HI=Herfindahl index of input- use concentration LEGAL=strength of legal systems 32  Factor price equalization: empirical evidence Factor prices will be equalized among countries that trade (factor price equalization theorem). Due to the connection between output prices and factor prices, factor prices are also equalized: w/r=w*/r* Trade increases the demand of goods produced by relatively abundant factors, indirectly increasing the demand of these factors, raising the prices of the relatively abundant factors.  In the L-abundant country the production of the L-intensive good ↑ → L demand ↑ → w ↑ → w/r ↑  In the K abundant country the production of the K-intensive good ↑ → K* demand ↑ → r* ↑ → w*/r* ↓ 33 Comparative International Wage Rates (United States = 100) In the real world, factor prices are NOT equal across countries. 34 Theory vs data The model assumes that trading countries produce the same goods  but countries may produce different goods if their factor ratios radically differ. The model also assumes that trading countries have the same technology  but different technologies could affect the productivities of factors and therefore the wages/rates paid to these factors. 35 Theory vs data The model also ignores trade barriers and transportation costs, which may prevent output prices and thus factor prices from equalizing. The model predicts outcomes for the long run, but after an economy liberalizes trade, factors of production may not move quickly to the industries that intensively use abundant factors.  In the short run, the productivity of factors will be determined by their use in their current industry, so that their wage/rental rate may vary across countries. 36 To sum up The Heckscher-Ohlin model predicts that relative output prices and factor prices will equalize, neither of which occurs in the real world. Empirical support of the Heckscher-Ohlin model is weak except for cases involving trade between high-income countries and low/middle- income countries or when technology differences are included. 37 Does trade increase income inequality within a country? Over the last 40 years, countries like South Korea, Mexico, and China have exported to the U.S. goods intensive in unskilled labor (e., clothing, shoes, toys, ‫ﮐﺎﻻ ھﺎی ﻣوﻧﺗﺎژ ﺷده‬ assembled goods). At the same time, income inequality has increased in the U.S., as wages of unskilled workers have grown slowly compared to those of skilled workers. Is trade with emerging countries the cause of the increasing income inequality in the US? 38 Source: Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, vol. 118, no. 1 (February 2003), pp. 1–39. Does Trade Increase Income Inequality? The Heckscher-Ohlin model predicts that owners of relatively abundant factors will gain from trade and owners of relatively scarce factors will lose from trade.  Little evidence supporting this prediction S" (e.g., skilled-labor- U" (e.g., unskilled-labor- 1. The model predicts that international trade affects relative output prices (PS/PU) and thus income distribution (wS/wU) but there is no evidence of a change in the prices of skill- intensive goods relative to prices of unskilled-intensive goods. 40 Does Trade Increase Income Inequality? 2. The model predicts that factor prices should converge: wU should increase in unskilled labor abundant countries relative to wS, but in some cases the reverse has occurred:  wS has increased more rapidly in Mexico than wU but Mexico is U labor abundant compared to the U.S. and Canada 3. Even if the model were exactly correct, trade is a small ‫ﺑﺧش‬ fraction of the U.S. economy, so its effects on U.S. prices and wages prices should be small. 41 Inequality has not increased in every open economy 42 Trade and Income Distribution Changes in income distribution are determined by a number of factors, not only international trade:  changes in technology  changes in consumer preferences  exhaustion of resources and discovery of new ones. ‫ﻓرﺳودﮔﯽ‬ Economists used to put most of the blame on skill-biased technological change and the resulting premium paid on education as the major cause of increasing income inequality in the US. Economists used to rich people make more money because they have more education. This makes the gap between rich and poor bigger Better education → Higher salaries → Bigger income inequality. 43  Increased wage inequality: the trade explanation Higher High Increased trade with a ‫ﭘﺎﯾﯾﻧﺗرﯾن‬ ‫ﻧﺳﺑت دﺳﺗﻣزد‬ Lower Low ‫ﭘﺎﯾﯾﻧﺗرﯾن ﻧﺳﺑت‬ low income country ‫دﺳﺗﻣزد ﮐﺎرﮔران‬ ‫ﮐﺎرﮔران ﻣﺎھر‬ leads to a higher ‫ﻣﺎھر ﺑﮫ ﻏﯾر‬ ‫ﺑﮫ ﻏﯾر ﻣﺎھر‬ ‫ﻣﺎھر در ﯾﮏ‬ ‫در ﯾﮏ ﻧﻘطﮫ‬ ‫ﻧﻘطﮫ ﺧﺎص‬ wS/wU. Producers in ‫ﺧﺎص اﺳت‬ ‫اﺳت‬ both sectors react by decreasing the relative employment of killed workers S/U↓ The graph shows how increased trade with lower-income countries can lead to higher wages for skilled workers and lower wages for unskilled workers, widening the wage gap. This happens because trade increases demand for skilled labor while decreasing demand for unskilled labor. 44  ‫ﻣﺗﻣﺎﯾل ﺑﮫ ﻣﮭﺎرت ﯾﺎ طرﻓدار ﻣﮭﺎرت‬ Increased wage inequality: skill-biased technological change explanation Tech development implies higher demand of skilled workers → it shifts out the relative demand for S in both sectors 45 Evolution of U.S. Non-Production– Production Employment Ratios in Four Groups of Sectors 46  The discussion on skill biased technological change was developed in the early 2000s, looking at back at what happened in the US market in the ’80s and ’90s The years after the NAFTA agreement (1994) were good ones for the US’s economy, including manufacturing. NAFTA North American Free Trade Agreement What happened in the 2000s? China’s accession to the WTO (2001)  The country’s size, and the speed at which it conquered rich- world markets for low-cost manufacturing, makes it unique.  By 2017 it had captured 13% of all manufacturing exports worldwide, compared with 2% in 1991. A decline in factory jobs in America  Between 1999 and 2011 America lost almost 6m manufacturing jobs in net terms (that may not be as dramatic as it sounds, since America is a large and dynamic place where around 5m jobs come and go every month) China's large size and its ability to quickly dominate global markets with cheap manufacturing make it stand out.By 2017, China was responsible for 13% of all manufacturing exports worldwide, up from just 2% in 1991 However, this might not be as big a deal as it seems because the U.S. is large and constantly changing, with around 5 million jobs being created or lost every month.  What are the issues? 1. Technological change Jobs and pay have been greatly affected by technological change. 1. Much of the increase in wage inequality in rich countries stems from new technologies that make college-educated workers more valuable (skill-biased tech change). 2. The rapid decline in the cost of automation has left the low- and mid-skilled at risk of losing their jobs.  What are the issues? 2. Labour market changes The American workers who had lost those jobs became unemployed or, more often, left the workforce. That contradicts the belief that America’s jobs market is fluid and flexible. The propensity of people to move in search of work has dropped sharply since the early 1990s, for reasons that are not yet fully understood. These changes in the labour market predate the rise of China. They have then been amplified by globalisation. This challenges the idea that America’s job market is flexible. The willingness of people to move for work has decreased significantly since the early 1990s, for reasons that are still not fully understood.These changes in the labor market started before China’s rise and have been made worse by globalization. What are the issues? 3. The 2009 US financial crisis The financial crisis and the long, slow recovery were ‫آﺷﻔﺗﮕﯽ‬ another source of turmoil. The college-educated bounced back more quickly than others. The financial crisis and the slow recovery caused more problems.College-educated workers recovered more quickly than those without a degree.  What are the issues? 4. Globalization The rapid emergence of China as an economic power. Export-led growth has transformed China from a poor to a middle-income country, taking hundreds of millions of people out of poverty.  New research suggests that China’s integration into global trade caused more lasting damage than expected to some rich-world workers. Those displaced by a surge in imports from China were concentrated in pockets of distress where alternative jobs were hard to come by. China's rapid rise as an economic power has changed it from a poor to a middle- income country through export-led growth, lifting hundreds of millions of people out of poverty.New research shows that China’s entry into global trade caused more lasting harm to some workers in rich countries than expected.Workers who lost jobs due to increased imports from China were often in areas where finding new jobs was difficult. What’s the role of globalization? Academics and policymakers had always understood that free trade creates losers as well as winners, but they thought that the disruption was transitory and the gains were big enough to compensate those who lose out. It is not easy to establish a direct link between openness and wage inequality, but recent studies suggest that trade plays a bigger role than previously thought. Academics and policymakers knew that free trade benefits some but also creates losers. However, they believed the disruption would be temporary, and the gains from trade would be large enough to make up for the losses. It’s hard to directly prove the connection between trade openness and wage inequality, but recent studies suggest that trade plays a bigger role in this than previously believed. make up = compensate ‫ﺟﺑران ﮐردن‬ Job losses, anti-globalization and politics Donald Trump won the presidential race with the support of blue-collar men in America’s South and its rustbelt. These areas lost lots of manufacturing jobs in the decade after 2001, when America was hit by a surge of imports from China Support for Brexit was strong in the north of England and Wales, where much of Britain’s manufacturing used to be; but it was firmest in places that had seen big increases in migrant populations in recent years. For those who want to know more Guriev Papaioannou (2022) The political economy of populism – Journal of Economic Literature 56