Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions HOV with technology and consumption dissimilarity Neil Foster and Robert Stehrer The Vienna Institute for International Economic Studies (wiiw) Version: 2012-04-25 Study carried out within the 7 th EU framework program project ’WIOD’ Grant agreement number 225 281. April 24-26, 2012 - WIOD conference, Groningen, The Netherlands Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Overview • Heckscher-Ohlin-Vanek and Ricardo • Testing HOV with technology differences ∗ Technology differences ∗ Accounting for traded intermediates ∗ Role of consumption patterns • Introducing consumption dissimilarity • Results preliminary • Conclusions/further steps Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Heckscher-Ohlin model • Ricardo: Technology differences determine patterns of trade ∗ 2 countries, 2 sectors, 1 factor (labour) ∗ Countries specialize in goods with relative productivity advantage ∗ England: Textiles; Portugal: Wine • Heckscher-Ohlin: Factor endowments determine patterns of trade ∗ 2 countries (L, C), 2 sectors (textiles, computers), 2 factors ∗ Same technologies across countries ∗ Identical and homothetic preferences ∗ Factors can move between sectors but not between countries • Note: Heckscher and Ohlin have been well aware of the strictness of assumptions and limitations (see Baldwin, 2010) Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions • Country L: Labor abundant; country C: capital abundant • Autarky patterns ∗ Relative price of labor lower in country L ∗ Country L produces relatively more of the labor intensive good ∗ Textiles in country L relatively cheaper • Heckscher-Ohlin: Factor endowments determine patterns of trade ∗ Free trade ⋆ Country L specializes in textiles ⋆ Relative price of textiles increases in country L ⋆ Relative price of textiles decreases in country C ⋆ Factor price convergence (Stolper-Samuelson) and equalization ⋆ County L exports textiles; Country C exports computers Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions • Issues ∗ Notorious problems with generalizations ∗ Strong assumptions (relaxations might make predictions ambiguous) ∗ Nonetheless: model became workhorse for decades • Looking at trade in factors helps ∗ Vanek, 1968; Travis, 1964; Melvin, 1968 ∗ Allows to increase dimensionality of model in any direction ∗ Example above: County L is net exporter of labor Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions • However ∗ Still little empirical support of model in factor trade ⋆ Little empirical support (e.g. Leontief paradoxon, 1953 and 1956) US was net exporter of labor (though capital abundant country) ⋆ Leontief, 1953 and 1956; many others ⋆ Results on testing predictions: ”... like a coin toss ...” (Trefler, 1993) ∗ Allowing for technology differences helps ⋆ Trefler, 1993 and 1995; others ⋆ Supporting original explanation given by Leontief (’Leontief was right!’) As US workers are more productive, US is - in productivity adjusted terms - labor abundant ∗ Davis and Weinstein (2002); Reimer (2006); Trefler and Zhu (2010) • Including traded intermediates ∗ Trefler and Zhu (2010); Deardorff (1982) Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Testing HOV with traded intermediates t r f ( I − A ) − 1 t = b ′ f ˜ f r − s r f f = V r f − s r f = d ′ = b ′ f b ′ f t f V f � �� � � �� � MeasuredFCT PredictedFCT ∗ t r f ... Measured net trade in factor f ∗ d f ... NC × 1 vector direct factor inputs ∗ b f ... NC × 1 vector direct and indirect factor inputs ∗ I ... Identity matrix ∗ A ... NC × NC coefficients matrix ∗ t r ... Country r trade vector (exports positive, imports negative) ∗ V r f ... Country r ’s endowment with factor f ∗ s r ... Share of country r in world consumption ∗ V f ... World endowment with factor f Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions • Interpretation ∗ Predicted FCT: V r f − s r f V f f ( I − A ) − 1 t r ∗ Measured FCT: d ′ ∗ Underlying assumptions ⋆ Identical and homothetic preferences ⋆ Factor-price equalization (in productivity adjusted terms) ⋆ Measuring FCT allows for productivity differences and trade in intermediates • Strong consumption similarity (SCS): f pr = s r f ∗ Country consumes proportion s r of final goods produced by every country ∗ Necessary and sufficient condition that Vanek prediction holds • Weak consumption similarity (WCS): f r = s r f ∗ Country r ’s consumption of good is proportional to what world consumes (regardless of where good is produced) ∗ Standard HOV: Condition if technologies are equal Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Empirical applications f ( I − A ) − 1 t r = V r t r f − s r f = d ′ f V f • Assuming same technologies: HOV prediction is like a ’coin toss’ Trefler, 1993 and 1995; Davis and Weinstein, 2001; Trefler and Zhu, 2010 • Allowing for technology differences: HOV prediction is met quite will Various tests: sign test, rank correlation test, regression • However, large amount of ’missing trade’ i.e. predicted trade is larger than measured trade in factors ∗ Home bias ∗ Non-homothetic preferences ∗ Quality of products traded bilaterally ∗ Solutions: ⋆ Trefler and Zhu (2010): Imposing structures on selected sectors ⋆ Cassing and Nishioka (2010): Introducing a vector of consumption differences) Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Accounting for consumption dissimilarity f ( I − A ) − 1 t r = V r t r f − s r = d ′ f V f f f ˜ f r − b ′ f s r b ′ = f f V r f s r f − b ′ = f If V r f S r f f − b ′ = Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Assumptions on consumption structures: S r Case Preferences Sourcing structures SCS Homothetic Proportional (1) Non-homothetic Proportional (2) Homothetic Empirical sourcing at country level (3) Homothetic Empirical sourcing at country-industry level (4) Non-homothetic Empirical sourcing at country level HOV Non-homothetic Empirical sourcing at country-industry level Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Tests • Sign test (90% and more) • Rank correlations are high and significant ( ρ = 0 . 9) • Already with assumption of SCS • Only slight improvements when introducing modifications • Regression tests: FCT measured , r = α + β FCT predicted , r + ε r Various specifications (OLS, FE, RE, ...) Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Strong consumption similarity: Total employment _1, EMP 50 BGRBRA PRT ROU RUS 0 MEX GRCHUN POL CZE CYP SVK SVN LUX MLT LTU LVA EST SWE DNK TUR FIN IRL BEL AUT TWN AUS CAN KOR ESP NLD ITA FRA GBR Measured FCT DEU -50 -100 -150 -150 -100 -50 0 50 Predicted FCT Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Non-homothetic and country-level sourcing (selected sample): Total employment _4, EMP 10 BRA ROU RUS BGR MEX 0 CZE HUN MLT LTU EST LVA POL LUX SVN SVK CYP IRL FIN PRT SWE TUR DNK GRC TWN AUT BEL Measured FCT AUS -10 CAN KOR ESP NLD ITA FRA -20 GBR DEU -30 -30 -20 -10 0 10 Predicted FCT Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
Overview Ricardo and HOV - A refresher Testing HOV Testing HOV bilaterally Conclusions Non-homothetic and country-level sourcing: Total employment _4, EMP 200 CHN 100 Measured FCT IND IDN 0 OTH JPN -100 USA EU -200 -200 -100 0 100 200 Predicted FCT Neil Foster and Robert Stehrer, wiiw WIOD 2012, Groningen
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