TY - JOUR
T1 - Fragmentation of Production, Comparative Advantage, and the Heckscher-Ohlin Theory
AU - Brondino, Gabriel
PY - 2021
Y1 - 2021
N2 - This article analyses the so-called trade-in-tasks models based upon the Heckscher-Ohlin theory recently developed to explain the process of fragmentation. These models continue to rely on comparative advantage to determine trade patterns. The notion of comparative advantage rests on the basic assumption that countries trade only finished goods whose production is domestically integrated. However, since fragmentation implies an increasing trade in intermediate and capital goods and domestic disintegration of production, it does not seem easy to see how comparative advantage continues to work. We identify two crucial assumptions behind these models that allow the principle to work: first, there is a strict distinction between intermediate and finished goods; second, intermediate inputs do not enter the production of themselves. One could relax these assumptions and consider circular production instead. Even so, we identify a third assumption: the neglect of payment of an interest rate over the value of inputs advanced in production. We relax this assumption and consider international capital mobility to show that comparative advantage fails to predict the trade pattern. Therefore, the Heckscher-Ohlin theory is incompetent to explain fragmentation and modern trade patterns.
AB - This article analyses the so-called trade-in-tasks models based upon the Heckscher-Ohlin theory recently developed to explain the process of fragmentation. These models continue to rely on comparative advantage to determine trade patterns. The notion of comparative advantage rests on the basic assumption that countries trade only finished goods whose production is domestically integrated. However, since fragmentation implies an increasing trade in intermediate and capital goods and domestic disintegration of production, it does not seem easy to see how comparative advantage continues to work. We identify two crucial assumptions behind these models that allow the principle to work: first, there is a strict distinction between intermediate and finished goods; second, intermediate inputs do not enter the production of themselves. One could relax these assumptions and consider circular production instead. Even so, we identify a third assumption: the neglect of payment of an interest rate over the value of inputs advanced in production. We relax this assumption and consider international capital mobility to show that comparative advantage fails to predict the trade pattern. Therefore, the Heckscher-Ohlin theory is incompetent to explain fragmentation and modern trade patterns.
KW - Fragmentation
KW - Heckscher-Ohlin model
KW - comparative advantage
KW - international capital mobility
KW - trade pattern reversal
KW - Fragmentation
KW - Heckscher-Ohlin model
KW - comparative advantage
KW - international capital mobility
KW - trade pattern reversal
UR - http://hdl.handle.net/10807/203676
U2 - 10.1080/09538259.2021.1977540
DO - 10.1080/09538259.2021.1977540
M3 - Article
SN - 0953-8259
SP - 1
EP - 20
JO - Review of Political Economy
JF - Review of Political Economy
ER -