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Can Comparative Advantage Explain the Growth of US Trade?

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  • Alejandro Cuñat
  • Marco Maffezzoli

Abstract

We present a dynamic comparative advantage model in which moderate reductions in trade costs can generate sizable increases in trade volumes over time. A fall in trade costs has two effects on the volume of trade. First, for given factor endowments, it raises the degree of specialization of countries, leading to a larger volume of trade in the short run. Second, it raises the factor price of each country's abundant production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. A simulation exercise shows that a fall in trade costs over time produces a non-linear increase in the trade share of output as in the data. Even when elasticities of substitution are not particularly high, moderate reductions in trade costs lead to large trade volumes over time. We present further empirical evidence in favour of our approach, documenting the link between trade liberalization and the cross-country divergence of investment shares.

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  • Alejandro Cuñat & Marco Maffezzoli, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEP Discussion Papers dp0669, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0669
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    1. Yonghyup Oh & Wonho Song, 2008. "Sub-Prime Financial Crisis and US Policy Choices," Finance Working Papers 22995, East Asian Bureau of Economic Research.
    2. Philip Sauré, 2012. "Bounded Love of Variety and Patterns of Trade," Open Economies Review, Springer, vol. 23(4), pages 645-674, September.
    3. Cuñat Alejandro & Maffezzoli Marco, 2007. "Specialization Patterns and the Factor Bias of Technology," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-27, July.
    4. Raphael A. Auer, 2010. "Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?," Working Papers 2010-13, Swiss National Bank.
    5. Alejandro Cunat & Szabolcs Deak & Marco Maffezzoli, 2022. "Tax Cuts in Open Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 83-108, July.
    6. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers 09.05, Swiss National Bank, Study Center Gerzensee.
    7. Auer, Raphael A., 2015. "Human capital and the dynamic effects of trade," Journal of Development Economics, Elsevier, vol. 117(C), pages 107-118.
    8. Surender Kumar & Prerna Prabhakar, 2020. "Industrial energy prices and export competitiveness: evidence from India," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 22(1), pages 1-20, January.
    9. William F. Lincoln & Andrew H. McCallum, 2011. "Entry Costs & Increasing Trade," William Davidson Institute Working Papers Series wp1024, William Davidson Institute at the University of Michigan.
    10. Anderson, James E. & Larch, Mario & Yotov, Yoto V., 2019. "Trade and investment in the global economy: A multi-country dynamic analysis," European Economic Review, Elsevier, vol. 120(C).
    11. Zymek, Robert, 2015. "Factor proportions and the growth of world trade," Journal of International Economics, Elsevier, vol. 95(1), pages 42-53.
    12. Fuxiang Wu & Zhibiao Liu, 2010. "Microeconomic Analysis on the Growth of Trade Volume in China: 1978–2007," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 5(2), pages 299-324, June.
    13. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779, Elsevier.
    14. Michael Sposi & Kei-Mu Yi & Jing Zhang, 2021. "Trade Integration, Global Value Chains, and Capital Accumulation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(3), pages 505-539, September.
    15. Auer, Raphael A., 2017. "Product heterogeneity, cross-country taste differences, and the growth of world trade," European Economic Review, Elsevier, vol. 100(C), pages 1-27.
    16. Ingianni, Andrea, 2012. "Intra-European Union trade openness and new members’ output convergence: A time-series analysis," Economics Discussion Papers 2012-5, School of Economics, Kingston University London.
    17. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers 13.01, Swiss National Bank, Study Center Gerzensee.
    18. Philip Sauré, 2007. "Productivity Growth, Bounded Marginal Utility, and Patterns of Trade," Economics Working Papers ECO2007/56, European University Institute.
    19. Immaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Sebastian Vollmer, 2007. "Competitiveness – A Comparison of China and Mexico," CESifo Working Paper Series 2111, CESifo.

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    Keywords

    International Trade; Heckscher-Ohlin;

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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