FUNDAMENTACIÓN LEGAL

The Heckscher–Ohlin theory (HO) argues that a nation’s comparative advan- tage comes from the relative abundance of its factor endowments. Factor endowments are resources that a nation’s businesses use to produce their products or services. There are two basic types of factor endowments. One is capital, which in trade theory refers to inputs that go into making a product or delivering a service, such as land, energy, machines, buildings, or tools. The other is labor. Not all nations have equal factor endowments. For example, the US has abundant supplies of natural resources such as land and energy. Japan has limited factor endowments in land and natural resources such as coal.

As in traditional views of comparative advantage based on the relative costs of inputs to production, the HO theory uses the relative abundance of capital versus labor to define comparative advantage. That is, a nation would have a comparative advantage in labor if it has more labor available than capital, even if it has less labor and capital than another nation. Like the theories of Ricardo and Smith, the HO theory argues that free trade is beneficial to all partners. However, for HO theory, international trade is driven not by relative differences in production efficiency but by relative differences in the factor endowments of countries.

With unrestricted trade, nations will export goods that require factors in which they have comparative advantage and import goods that require factors in which they are relatively less endowed. For example, Brazil exports coffee and France exports wine because they have the factor endowment of the right soil and climate conditions for growing coffee beans and grapes. China exports huge numbers of garments and textiles to the US and Europe because it has comparative advantage in cheaper labor.

Consider again our example of your lost island. When your ship sank, not only you but also your friend managed to swim to shore on the same island. When Jane’s ship sank she was the only one to swim to the same island as you. However, her boat’s fishing equipment washed ashore. On your half of the

Heckscher–Ohlin theory (HO)

a nation’s comparative advantage comes from the relative abundance of its factor endowments

island, with two people, you have more factor endowments in labor. On Jane’s half of the island, with her fishing gear, Jane has more factor endowments in capital. Even if Jane were a great farmer, HO theory would predict that Jane should use her superior factor endowments and specialize in fishing while you use your superior labor force and do farming. You can then trade.

One additional prediction of the HO theory is that trade will lead to factor price equality among partners. What this means is that the prices of the capital and labor that goes into producing something in both countries will gradually become equal. Prior to trade, the price of goods produced from the rarer factor—say, for example, industrial products in agricultural countries—would cost more. This makes sense because we usually have to pay more for things that are in short supply. After trading with nations endowed with industrial production capacity, the supply of industrial goods in the agricultural nation goes up. Again, based on simple supply and demand, we would expect prices for industrial products in the agricultural nation to decline. Thus, for example, HO theory would predict the reduction of wages for unskilled workers (a reduc- tion in labor costs) in the US when the types of goods produced by these workers are imported from countries like China or Mexico with high endowments of unskilled labor. As you will see from some of the strategic insights in this chap- ter, the likelihood of this happening is one reason why many unskilled workers look to the government to protect their industries from low-cost country competition.

Exhibit 4.5 shows World Bank statistics on the capital per worker endowments of various countries. Based on the HO theory, which countries would you predict to export and import goods that involve capital-intensive production?

Industrial Countries Developing Countries

10000 20000 30000 40000 50000 60000 70000 80000

Japan Germany US Italy Spain UK

Korea Mexico Turkey India Kenya

Exhibit 4.5

Capital Stock per Worker in Selected Industrial and Developing Countries

Source: A. Heston, R. Summers, and B. Aten, 2002, Penn World Table Version 6.0, Center for

For approximately two decades after the introduction of the HO theory, most economists took intuitive examples like capital-intensive Germany export- ing technical machinery as evidence that the HO theory was correct. In the early 1950s, Wassily Leontief produced the first comprehensive test of the HO theory and found some unusual results.6 _{The next section details the findings of this}

study.

The Leontief Paradox According to the HO theory, a capital-intensive country such as the United States should export capital-intensive goods and import labor-intensive goods. To test this hypothesis, Leontief looked at 200 industries in the US. Contrary to expectations, he found that the US was export- ing relatively more labor-intensive goods and importing capital-intensive goods. Much to the surprise of economists, the US exports were about 30 percent more labor-intensive than its imports. This result was so contrary to expectations that this finding became known as the Leontief Paradox.

Updating the HO Theory Although the Leontief Paradox showed that the simple form of HO theory could not fully explain world trade, economists up to the present time have continued to modify and update the theory. Current empirical tests of the theory show that, in its updated versions, the HO theory can explain many aspects of trade quite well.7

One assumption of the HO theory is that tastes in countries are identical. That is, people in different countries enjoy the same products. Given equal tastes, countries will import goods for which they have a comparative disadvan- tage. But what happens if a capital-intensive country, for example like Germany, has consumers that have strong preferences for capital-intensive goods such as high technology cars? Such a taste bias may completely offset the German com- parative advantage in capital-intensive goods and result in Germany importing more capital-intensive goods even in areas of its comparative advantage. For example, Germany still imports luxury cars from Japan. However, research also suggests that most countries have a “home bias” in tastes and prefer to consume goods made in their own country. Adjusting the HO theory for taste differences can partially explain the Leontief Paradox, but these differences are not enough to offset the Paradox completely.

A second assumption of the original HO theory was that the companies in different nations used similar technologies to produce their goods. A look at the US and Japanese automobile producers in the 1970s and 1980s shows this as untrue. Using innovative production and supply technologies, the Japanese car makers outcompeted their US rivals with cheaper and higher-quality vehi- cles. Their imports into the US rose so fast that the US government convinced the Japanese to adopt voluntary quotas to limit Japanese competition. Although US manufacturers managed to increase quality and efficiency of production to compete with their Japanese rivals, companies like Toyota continue to use manufacturing technologies that are more efficient than those used by US companies. Most recent economics research suggests that trade is best explained by both Ricardo’s comparative advantage in efficiency of production (in part due to superior technologies) and the relative factor endowments identified by HO theory.

Leontief Paradox

when a capital-intensive country exports more labor-intensive goods and imports capital-intensive goods

Another advance in the HO theory is a refinement of the two factors of capital and labor into more detailed classifications. Most economists now consider factor endowments as farmland, raw materials or natural resources, human capital or skilled labor, manmade capital such as transportation systems, and unskilled labor. The HO theory works much better with a more precise breakdown of resources. For example, it then makes more sense that the US is a big exporter of agricultural products (based on the large endowment of arable land) and also outputs like super-computers (based on large endowments in university and industry research and development).

Exhibit 4.6 shows the relative factor endowments of selected countries as a percentage of world totals. Note that the US and the EU are highly endowed with capital and skilled labor but lack unskilled labor endowments. India and China dominate with unskilled labor, but the Chinese have more skilled labor endowments than does the US. Recent US trade data suggest a pattern consistent with the HO theory. The US exports more goods and services requiring skilled labor than it imports, and it imports more low-skilled labor-intensive manu- factured goods such as athletic shoes and textiles. For a specific case, look at Exhibit 4.7 to see if this pattern holds for the trade between the US and India. This Exhibit shows the trade balance of exports and imports of the US with India. The positive numbers show the top ten product categories in which the US exports more to India than it imports. The negative numbers show the top ten product categories in which the US imports more than it exports to India, hence a negative trade balance.

Most economists believe that the continuing modifications to the HO theory produce a reasonable explanation of a significant amount of world trade. However, the model is still not a complete explanation and one needs to under- stand alternative models to grasp more completely the complexities of world trade. We now turn to examine some of these complementary and alternative views.

Japan Canada Mexico China India Hong Kong, Korea, Taiwan, … Eastern Europe 0 5 10 15 20 25 30 35

Capital Skilled Labor Unskilled Labor United

States

European Union

Exhibit 4.6

Types of Factor Endowments of Countries and Regions (percent of world total)