For quite some time now academics have tried to explain not only the motivations and benefits, but also why through trade, some countries grow more quickly and wealthier than others. “The evolution of trade into the form we see today reflects three events: the collapse of feudal society, the emergence of mercantilist philosophy, and the life-cycle of the colonial systems of the European nation-states” (Czinkota, Ronkainem, Muffett, pp128 2009).
The following essay will first explore some of the mainstream trade theories, such as the Heckscher-Ohlin trade theory and the Gravity model; and the time sequence in which they came about. Trade is argued to produce more gains in the form of increased overall output, than in a state of autarky; so the theories go. However, this statement will be empirically tested with the ten most important export partners for Pakistan and the accuracy of the theories evaluated all within the time-series of 2006 to 2010.
Since the fall of Mercantilism, at the start of the evolutionary path of trade was Adam Smith with his theory of absolute advantage; that countries should specialize in the production of that good in which it produces most efficiently and export it. Subsequently, David Ricardo’s theory of comparative advantage stated that the good that a country is relatively more efficient in producing should be should be specialized in and exported; in exchange for the good that it is relatively less efficient in producing which is imported. An expansion of Ricardo’s theory is the Heckscher-Ohlin theory of trade which, rather than assuming comparative advantage, explains it as it postulates that differences in labour, labour skills, physical capital, land or other factors of production across countries create productive differences that explain why trade occurs. Furthermore, a country which is labour abundant (capital abundant) should specialize in the production and export of that product which is relatively labour intensive (capital intensive) as locally abundant resources means cheaper production of a good because the price of its inputs will be cheaper. Likewise, the country should import that product whose production requires the intensive use of the country’s relatively scarce and expensive factor.
The Essay on International Trade Countries Free Agreement
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A mathematical way of determining trade patterns between countries is the Gravity model which uses such variables as: economic size, distance between them, cultural and colonial links, regional trade agreements (RTAs), exchange rates, other factors; as a full model specification:
The dependant variable is exports which correlates to gross domestic product (GDP) reflecting income, distance between countries ( – DIST) reflecting transport costs, GDP per capita (GDPPC)reflecting factor endowments; these first three are the gravity variables. Furthermore, adjacency (ADJ), language (LANG), and regional trade agreements (RTA) denoted as EU; the binary variables have a positive effect on trade.
Source: ESDS World Bank Data
After services, agriculture accounts for the largest component of GDP for Pakistan which has a GDP of $1.75 trillion and per capita: $1006 in 2010. However, this labour intensive sector supplies mainly domestic demand as only 1%-2% of this is exported between 2006 and 2009. Approximately, 80% of merchandise exports are that of capital intensive manufactured goods such as textiles, leather goods, sports goods and chemicals. Subsequently, this seems to conflict with the Heckscher-Ohlin theory as labour abundant Pakistan exports capital intensive goods. Furthermore, Pakistan imports more than 50% of manufactured goods as a percentage of merchandise imports further weakening trade theory (ESDS, World Bank Data).
The Essay on Caribbean Basin Trade Development Countries
Emerging Markets and Regions - Caribbean Shelly King International Business MGT/448 Ignacio Arrobas [FAC] July 9, 2003 Introduction The Eastern Caribbean is made up 0 f 600-mile long sweep of islands known as the Lesser Antilles. Collectively, they " re a mixture of African, European and East Indian influences and it's possible to island hop between the cultural extremes. It's a mecca for diving, ...
Pakistan; a net importer shows a degree of openness to trade as both imports and exports of commodities are higher than that of the US although lower than the UK and through its regional trade agreement with China. In addition, according to taxes on international trade; Pakistan shows a more protective side as they greater than the US, UK and China; however this follows a downward trend indicating a growing willing to trade (ESDS, World Bank Data).
Source: ESDS World Bank Data; CEPii GeoDist for Distance
The first graph above displays the ten most important trading partners, with respect to exports, of Pakistan. At the top of this list is the US, a capital abundant economy which imports mostly capital intensive produced goods from a labour abundant country. It appears that, this does not support the Heckscher-Ohlin (H-O) theory but in fact strengthens the case for the Leontif Paradox which stems from a case where an empirical study of US trade was conducted which found that US import substitutes were 30% more capital intensive than US exports whereas the US is a relatively capital abundant country (Vaghefi, Paulson, Tomlinson, pp66, 1991).
Furthermore, the table above provides some variables for the gravity model; the facts do not support the model with respect transport cost i.e. distance between Pakistan and the US.
However, the economics size of the use does support the model and cheap inputs for production may explain this paradox as high income countries like to exploit low income countries for their resources. On the other hand, trade patterns between China (relatively labour abundant) are explained, to a degree, by the H-O theory as it imports capital intensive products from Pakistan. Moreover, these countries share a bilateral regional trade agreement in the form of Free Trade Agreement and Economic Integration Agreement, have relatively low transport cost which all in turn boosts trade. Low transport costs are also reflected for Afghanistan (labour abundant) as it is landlocked with Pakistan and it imports capital intensive product as does Turkey (labour abundant) strengthening the H-O theory. Cultural and religious ties may also in part explain the trade with Afghanistan more strongly but also with Turkey, UAE and Saudi Arabia all of which, including China are in Asia as is Pakistan.
The Essay on China And Taiwan Pakistan People Country
U. S. Looks to Ease Tensions In Asia The Deputy Secretary of State has planned a five nation trip. The purpose of this trip is to bring peace between not only India and Pakistan but also China and Taiwan. India and Pakistan continue to dispute about the ownership of Kashmir. There is hope of peace talks to take place between the two countries. Upon his visit to China and Taiwan, Richard Armitage ...
Trading with these countries is also attributed to the similarities in consumer tastes and trading priorities. Emergence of the new rich in China and the expansion of middle-income consumers in UAE and Saudi Arabia give opportunities for Pakistan to boost trade with these nations; this falls in line with the Linder Hypothesis that demand characteristics explain trade. Other than the distance variable, trade gravity could be said to have directed in part, external trade from Pakistan to Italy, Germany, Spain, UK and the US as these relatively high GDP per capita countries consume more capital intensive goods and are also relatively open to trade. Additionally, the UK shares colonial ties with Pakistan which may partially explain why the UK is 5th on the top ten list. However, the Heckscher-Ohlin theory is not supported here not only because Pakistan (labour abundant) exports more capital intensive goods but also because these capital abundant countries import capital intensive goods from Pakistan.
Source: ESDS, World Bank Data
Although trade growth is more volatile than GDP growth, the above graph does indicate that part of the recovery from the global financial crisis may have been attributed to trade or at least growth of them both is similar from 2008 to 2009.
The results from this essay indicate that in some cases such as with China, Afghanistan and Turkey; the Heckscher-Ohlin (H-O) trade theory holds such that these relatively labour abundant countries do import capital intensive produced goods. However, two problems still exist: firstly, let us not forget that Pakistan – a labour abundant country exports relatively more capital intensive produced goods than labour intensive produced goods, albeit to a labour abundant nation; this negates the H-O standards. Secondly and perhaps more importantly: what about the rest of the seven assumed capital abundant countries? These still import relatively more capital intensive produced goods from Pakistan. Perhaps then, explanation of the trade patterns can be made through the gravity model. Subsequently, this model does explain trade patterns but in a ‘mix and match’ manner; for example it is obvious that the sheer economic size of the US accounts for it being the largest export destination for Pakistan ignoring the other gravity variable: distance; which indicates substantial transport costs. However, these are theories; the question of whether gains can be made through trade remains; it appears that gains are possible however, if high income countries always have the comparative advantage then low-income countries may stand to be left behind and further exploited. Therefore, questions of protectionism appear fuelled even more so by the global economic downturn.
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Bibliography:
* CEPII, 2012, GeoDist, 113 rue de Grenelle Paris, CEPII, available at: http://www.cepii.fr/anglaisgraph/bdd/distances.htm accessed on 10/2/12
* ECONOMIC & SOCIAL DATA SERVICE INTERNATIONAL, 2011, Direction of Trade, International Monetary Fund, University of Essex, ESDS, available at: http://www.esds.ac.uk/ accessed on 11/2/12
* ECONOMIC & SOCIAL DATA SERVICE INTERNATIONAL, 2011, World Development indicators, World Bank Data, University of Essex, ESDS, available at: http://www.esds.ac.uk/ accessed on 11/2/12
* M.R. CZINKOTA, M.H. RONKAINEM & M.H. MUFFETT, 2009, Fundamentals of International Business, 2nd Ed, Baltimore USA, Wessex Press
* M.R. VAGHEFI, S.K. PAULSON, W.H. TOMLINSON, 1991, International Business Theory & Practice, 4 John St London, Taylor & Francis
