The Heckscher-Ohlin Trade Theory and Technological Advantages: Evidence from Turkey and USA Meltem Ince, Orkun Kozanoğlu, Mehmet Hulusi Demir Abstract- Heckscher-Ohlin theory of international trade is one of the progresses to test factor endowments and production together. It is a basic long-run macroeconomic model in which factors are compared between countries. This paper considers two countries with the commodities in Heckscher-Ohlin model of international trade depending on the technological changes. The theory says that developing countries mainly export labor intensive products while developed countries generally export capital intensive products. Turkey s major export products are textile and apparel. On the other hand, USA exports mainly vehicles, organic chemicals, electrical machinary and railway & tramway parts. Therefore, Turkey and USA are compared under the theory of Heckscher-Ohlin by measuring productivity and technological differences. Key variables: Heckscher-Ohlin trade theory, Capital intensive, Labor intensive, Technology I.Introduction One of the most influential conceptual frameworks for theoretical and emprical work is Heckscher-Ohlin Model. It is well known that comparative advantage changes over time depending on differences across countries according to factor endowments and changes in technology. A large number of developing countries have shifted to more export-oriented development strategies over time and many of these countries have been integrated into global trade of labor-intensive manufactures. Many developing countries economies are still examined by their exports and imports. Export performance by developing countries is highly different. Its patterns differ significantly by country and region. Technology plays a significant role in the trade patterns of industrial countries. Why is it important in developing countries? Most trade theory assumes that technological activity plays no role in the comparative advantage of developing countries, and that the main determinants remain relative factor endowments. Developing countries are assumed to be technological followers, importing innovations from developed countries and using them passively [3]. Meltem Ince (Assist.Prof.Dr.) is with the Department of Economics, Yasar University, Izmir, TURKIYE, (meltem.ince@yasar.edu.tr). Orkun Kozanoğlu (Assist.Prof.Dr.) is with the Industrial Engineering Department, Yasar University, Izmir, TURKIYE, (orkun.kozanoglu@yasar.edu.tr). Mehmet Hulusi Demir (Prof.Dr.Dr.) is with the Industrial Engineering Department, Yasar University, Izmir, TURKIYE, (hulusi.demir@yasar.edu.tr). The rest of paper is organized as follows: section II gives a brief account of the theory of Heckscher-Ohlin, the main assumptions of this model and deals with the role of technology. Section III is devoted to the review of some literature about Heckscher-Ohlin Theory. Section IV looks at the data set and also provide a summary of the datas. Concluding remarks are given in Section V. II. The Heckscher-Ohlin Theory Traditional trade theories lie between in two approaches, Ricardian and Heckscher-Ohlin Model. In the Ricardian approach, relative labor productivity differentials are alone to generate a basis for trade across countries. On the other hand, the Heckscher-Ohlin approach assumes identical production functions for the same commodities over the world and the and the possibility of technological differences in terms of differences in relative factor endowments [9]. The Heckscher-Ohlin model indicates that trade will increase the demand for the goods produced by the country s abundant resource. Since the abundant resource in most developing countries is labor, the prediction is an increase in demand for labor intensive goods. On the other hand, making trade provides a developing country the opportunity to learn from the more advanced technologies of the developed world. This technological exchange is expected to help developing countries catch-up with the developed countries more rapidly. Patterns of comparative advantage between developing countries vary according to national policies for technological learning and technology import, even if they have similar endowments of labour, capital or skills. Traditional theories of comparative advantage may be relevant in cases where their assumptions conform to the specific conditions of capability building in given industries and locations, not as general rules. For instance, H-O factor price ratios can affect trade patterns in activities in which technological conditions approximate perfect competition, i.e. no scale economies, universally available technologies and easy learning. These apply to simple labour intensive technologies where small firms can make undifferentiated products, easily mastering the technologies involved [6]. It can be concluded that the Heckscher-Ohlin Theory explains why many developing countries export labor-intensive manufactures to developed countries in exchange for imports of skill-intensive manufactures. III. Literature Review on Heckscher-Ohlin Theory Heckscher-Ohlin Theory offers a simple and familiar way of analysing linkages between factor supplies and the composition of trade. Recent research [1] shows that H-O theory has a lot of explanatory power if its domain is restricted to broad product categories (rather than specific Sep 2011 ATBAS-50127046 Asian-Transactions 17
goods, for which scale economies are often the main determinant of trade) and if capital physical and financial is excluded from the list of production factors, because of its international mobility. Recent work by [15] has suggested that Heckscher- Ohlin Theory does indeed help to explain trade patterns, so long as the researcher bears in mind the fact that countries are not distinguished by differences in factor endowments alone. Such as Weinstein shows that Heckscher-Ohlin Theory is consistent with the data, as long as it is modified to take account of the facts that technology differs across countries, that some goods are non-traded and international trade is costless. [7] has advanced the study of cros-country productivity differences one step further. He allows different factors to display varying degress of relative productivity. Therefore, he considers technological differences across countries as a determinant of comparative advantage. He finds that, by applying measures of relative factor productivity to the factor supplies of 10 industrial countries over 20 years, specialization within 7 countries can be largely explained by technological differences. [2] notes that trade between two countries that are identical in every respect but the initial capital/labor ratios (relative factor endowments) would come to an end in the long run. So trade could continue to occur in the long run only in the presence of additional differences which would cause factor proportions to evolve and change comparative advantage over time. [5] determine that Heckscher-Ohlin Theory links specialization of production to relative factor endowments. Endowments are the results of accumulation in response to economic incentives. They estimate the effect of factor proportions on specialization in a cross-section of OECD countries. They show that using the estimation results alone, they can not distinguish between specialization driven by factor proportions and specialization that is correlated with factor proportions for other reasons. But their results are consistent with evidence on sectoral factor intensities, which supports the Heckscher-Ohlin Theory. [11] addresses a largely overlooked issue in the dynamics trade literature by considering the role that differences in the speed of population growth across countries plays as long-run determinants of comperative advantages within a Heckscher-Ohlin framework. The countries are assumed to have exactly the same preferences and to produce the same commodities by employing identical production technologies for each commodity. The required differences in relative prices for opening of trade between the countries are shown to arise immediately after the initial state. The country with lower population growth rate becomes relatively capital abundant, whereas the country with higher population growth rate becomes relatively labor abundant. Moreover, trade leads to an equalization of factor prices as in Heckscher-Ohlin framework. [4] extends the HO international trade model to show that countries specializing in the production and export of labor-intensive goods will tend to see a decline in the incentive to invest in education due to the immediate expansion in low-skilled employment. In the long run this leads to a tendency to decumulate rather than accumulate human capital in these countries, which are typically the labor abundant developing economies. The developed economies on the other hand start out with a higher skill level and therefore tend to specialize in high-skilled production. [10] studied the relationship between factor flows and trade in a H-O model. He considered a situation where a prohibitively-high tariff on imports shuts off trade and raises the return to capital in the country where it is the relatively scarce factor. This leads to a capital inflow to that country and an increase in the production of the capital-intensive good and a decrease in the production of the labor-intensive good (which had been the export). Capital inflows continue until relative factor endowments in the two countries are identical. An example can be given in which countries have different technologies. For example, suppose each of two countries has the same labor productivity but one country enjoys higher capital productivity. The country with the higher capital productivity will export the capital-intensive good. When capital is internationally mobile, it will seek its highest returns and thus flow to the high capital productivity country. IV. Patterns from Turkey There are many ways to categorise products by technology. A commonly used method is to distinguish between resource-based, labour-intensive, scale-intensive, differentiated and science-based manufactures. This is difficult to use because the analytical distinctions are unclear and there are large overlaps between categories. The OECD (1994) suggests a more detailed classification based on technological activity within each category. The scheme used here combines both, and extends them to take account of product groups or clusters of particular export interest to the developing world [7]. Primary products (and special transactions, excluded completely below) do not need much analysis in terms of the technological basis of comparative advantage. Within manufactured exports, the technological categories and subcategories are as follows: Resource based (RB) products tend to be simple and labour-intensive (e.g. simple food or leather processing), but there are segments using capital, scale and skill-intensive technologies (e.g. petroleum refining or modern processed foods). Low technology (LT) products tend to have stable, well-diffused technologies. The technologies are primarily embodied in the capital equipment; the low end of the range has relatively simple skill requirements. Many traded products are undifferentiated and compete on price: thus, labour costs tend to be a major element of cost in competitiveness. Medium technology (MT) products, comprising the bulk of skill and scale-intensive technologies in capital goods and intermediate products, are the heartland of industrial activity in mature economies. They tend to have complex technologies advanced skill needs and lengthy learning periods. 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High technology (HT) products have advanced and fastchanging technologies, with high investments and prime emphasis on product design. The most advanced technologies require sophisticated technology infrastructures, high levels of specialised technical skills and close interactions between firms, and between firms and universities or research institutions [7]. Table 1: Trade between Turkey and USA (Million dollar, %) Table 2: CEP of Turkey and USA Comparative Export Performance Turkey USA Raw material intensive goods 1999 1,485643 1,675634 2000 1,507892 1,585648 2001 1,382761 1,436739 Year Export Change Export Change USA Import Change Import Change USA (TR) % Turkey's export performance has been impressive, especially in the first half of the 1990s. 1999-2000 period had witnessed relatively small increases in export. Between 1990 and 2003, exports grew at an average annual rate of 17.2%, while manufactured goods exports increased in current US dollars at an annual rate of 26.2%. Exports came from 10.8 million US dollars in 1990 to 27.3 million US dollars in 2003. As shown in the table above, Turkey has increased its trade between USA, but economic crisis in 1999 and 2001 affected Turkey`s trade negatively, but after that it has started to show an increasing trend. 100 90 80 70 60 50 40 30 20 10 0 (to USA) % Share of Exports (TR) % 1990 10,8 0.8 18,9 0,8 Figure 1: Sectoral Shares of Turkey 1995 1996 1997 1998 1999 2000 2001 Agriculture Mining Manufacturing Services As seen from the figure, Turkey is showing a very high share of manufacturing compared to others. On the other hand, as it is said before, manufacturing includes textile, clothing and footwear which are labor intensive goods and the main exported products to USA. So manufacturing has a very significant effect while agriculture, mining and services have a very low effect on Turkish exports. (to USA) % Share of Imports 1997 16,3 8,7 4,2 2,3 14,9 28,6 10,5 2,6 5,8 9,8 1998 18,5 1,6 4,3 3,4 18,4 25,9 2,6 3,2 2,4 10,2 1999 16,9-0,9 4,5 3,7 18,3 21,7-9,8 3,7-6,7 10,4 2000 17,8 2,8 4,3 3,5 18,6 24,5 24 4,2 5,6 12,6 2001 21,9 8,4 4,5 2,9 18,9 31,8-18 3,2-17,6 13,2 2002 25,8 11,5 4,9 5,4 20,3 31,7 16,4 5,4 12,3 13,9 2003 27,3 10,8 5,8 6,4 21,3 48,3 24,8 7,3 16,9 17,4 Source: UNDP, 2003 2002 1,490189 1,518037 Labor intensive goods 1999 2,672199 1,314561 2000 2,371106 0,980438 2001 2,617893 0,956634 2002 2,543791 0,952611 Capital intensive goods 1999 0,876134 2,034169 2000 0,874562 2,415284 2001 0,806157 2,489563 2002 0,854179 2,586122 Source: United Nations, Yearbook of International Trade Statistics, 2003 This following conclusion can be drawn for Table 2. Turkey appears to have been keeping its strong position of comparative advantages in the export of raw materials and labor intensive goods. Concerning capital intensive goods, Turkey s CEP values are still very low. Meanwhile, USA possessed relative advantage in export of capital intensive goods and raw materials while it has decreased its competitiveness remarkably in labor intensive goods. As Table 3 represents below, the highest rate of export growth is achieved in electrical machinery and electronics which is followed by machinery. This is important from the point of technological aspects of exports. When all three markets are compared, the USA has a dominant position in terms of the sectoral rates of export growth. However, export growth to the USA is based primarily on textiles, rubber, seramics and chemicals. The Middle East is the destination of mainly consumption goods, like textiles, food and electrical machinery. The EU has a different position that can be verified from two points. First, the Turkish exports to the EU are growing more than the overall average. Second, the fastest growing sectors in exporting to the EU are textile and electrical machinery and electronics which are followed by machinery and clothing. Sep 2011 ATBAS-50127046 Asian-Transactions 19
Sectors Table 3: Growth of industrial exports in the three main markets 1995-2002* Total Growth Annual Growth in percentage EU* ME** USA*** Table 4: Export Classification in Turkey 1995 1996 1997 1998 1999 2000 2001 2002 Labor Intensive 44,7 46,2 45,9 47,4 47,2 44,7 46,2 44,9 Textile 21,5 20,6 21 21,4 20,7 22 21,5 22,5 Food 15,2 14,9 20,8 26,7 Textile 13,9 37,5 26,6 35,6 Clothing 11,6 28,2 6,4 23,7 Leather -2-2,4-6,3 8,7 Rubber 10,8 16,1-6,8 45,2 Seramics 12,6 15,1 2,4 30,5 Chemicals 6,3 4,7-8,4 26,8 Basic Metals 6,7 20,8 1,1 18,8 Machinery 19,1 32,3-0,4 29,5 Electrical Mach. 25,1 35,9 21 28,4 Source: The Undersecretary of Foreign Trade As Table 4 indicates the relative shares of the resource and the labor intensive sectors together are showing a stable position about 13.0 percent and 45.9 percent of manufacturing exports. Since exports of resource and labor intensive goods together are having more than half of the total, it can be concluded that the Turkish manufacturing exports are still based on resource and more definitely on labor intensive sectors, like food, textiles and clothing. On the other hand, scale intensive sectors are losing field in the manufacturing exports. More specifically, this decreasing trend in the shares of scale intensive commodities is decreasing mainly from two sectors, i.e. chemicals and basic metals, i.e. iron and steel. * European Union Countries ** Middle East Countries *** United States of America Clothing 21,9 24,4 23,6 24,5 24,7 20,6 22,9 20,1 Footwear 0,9 0,8 0,9 1 1,1 1,4 0,9 1,1 Furniture 0,4 0,4 0,4 0,5 0,7 0,7 0,9 1,2 Resource Intensive 12,3 11,8 13,9 12,9 12,2 13 13,4 12,9 Food 9,2 8,6 11 10,7 10,6 11,3 11,5 11,3 Forest 0,3 0,4 0,3 0,3 0,3 0,2 0,4 0,4 Petroleum 2,8 2,8 2,6 1,9 1,3 1,5 1,5 1,2 Scale Intensive 34,6 31,9 28,5 26,4 28,1 28,2 24,9 24,3 Paper 0,6 0,7 0,7 0,7 0,8 1 0,8 0,8 Chemicals 12,4 9,2 7,6 6,7 6 6,2 6 6,1 Rubber 1,7 1,2 2 2,2 2,1 2,3 2,6 2,5 Nonmeltallic Pr. 3,2 3,9 4,4 4,3 3,7 3,7 3,6 3,8 Basic Metals 16,7 16,9 13,8 12,5 15,5 15 11,9 11,1 Science Based 1,6 2,8 3,1 2,4 2 2 1,9 2,2 Source: State Institute of Statistics, 2002. V. Conclusion This paper has mapped out trends in manufactured exports between Turkey and USA, and made a case for the technological approach to the analysis of comparative advantage. The law of comparative advantage dictates that trade will occur and create welfare gains for all nations involved. Heckscher-Ohlin theory considers differences in relative scarcity of factor endowments across nations and differing factor intensities across commodities. A new policy framework is in process of formulation in Turkey. This process coincides with a trend where the manufacturing exports are becoming increasingly technology intensive. Since export of differentiated products is growing faster, it can be expected that product diversification will be extended. Turkey has a great performance in exporting raw materials and labor intensive goods while USA has been keeping its position in exporting capital intensive goods. It can be said that the Turkish exports have relied heavily on labor intensive textiles and clothing. It can be concluded first that the Turkish exports are becoming more diversified in its commodity content, second and more importantly for the aim of this paper, the exports of high technology commodities are increasing more rapidly than the average. It should also be added that overall export growth is significant in itself which probably is an outcome of the structural developments of 2000 s, i.e. faster growth of electrical machinery & electronics. Sep 2011 ATBAS-50127046 Asian-Transactions 20
Therefore, policy recommendations should be done to improve technological commodities to achieve the aim of faster growth in Turkey. REFERENCES [1] Aldaz-Carroll, E. (2002), Heckscher-Ohlin in logs, Institute of Development Studies, University of Sussex, Mimeo. [13] The Undersecretary of Foreign Trade Publications, 2009. [14] United Nation Development Programme: The Millennium Development Goals Report 2010. [15] Weinstein D., (2001), An Account of Global Factor Trade, American Economic Review 91 (5): 1423-1451. [2] Chen Z., (1992), Long Run Equilibria in a Dynamic Heckscher-Ohlin model, Canadian Journal of Economics 25, 923-943. [3] Fagerberg, J. (2003), The dynamics of technology, growth and trade: A Schumpeterian Perspective, Centre for Technology, Innovation and Culture, University of Oslo1 [4] Findlay, R. (1995). Factor Proportions, Trade and Growth, MIT press, Cambridge. MA. [5] Fitzgerald A. and Carlos Hallak (2002), Specialization, Factor Accumulation and Development, Harvard University. [6] Haque I. ul. (1995), Trade,Technology and Competitiveness, Wahington, D.C.: The World Bank Economic Institute, 11-48. [7] Harrigan J. (1997), Technology, Factor Supplies and International Specialization: Estimating the Neoclassical Model, American Economic Review 87, 475-494. [8] Kepenek Y.(2001), Some Technological Aspects of the Turkish Manufacturıng Exports during the 1990s, Middle East Technical University, Ankara/Turkey. [9] Leamer E. E., (1995), The Heckscher-Ohlin Model in Theory and Practice, Princeton Studies in International Finance, No:77, Princeton University, pp.1-50 [10] Mundell R. (1997), International Trade and Factor Mobility, American Economic Review, volume 47, pp. 321-335. [11] Sayan S. (2002), Dynamic Heckscher-Ohlin Results From a 2x2x2x2 Overlapping Generations Model with Unequal Population Growth Rates, Discussion paper, no:02-01, Bilkent University. [12] Taymaz E. And E. Özçelik (2002), Does Technology Matter for International Competitiveness in Developing Countries?, The Case of Turkish Manufacturing Industries, ERC Working Papers in Economics 01/07, Middle East Technical University. Sep 2011 ATBAS-50127046 Asian-Transactions 21