Rn pineal Evidence on the Heckscher Ohlin Model

Since the factor-proportions theory of trade is one of the most influential ideas in international economics, it has been the subject of extensive empirical testing.

Testing the Heckscher-Ohlin Model

Tests on U.S. Data. Until recently, and to some extent even now, the United States has been a special case among countries. The United States was until a few years ago much wealthier than other countries, and U.S. workers visibly worked with more capital per person than their counterparts in other countries. Even now, although some Western European countries and Japan have caught up, the United States continues to be high on the scale of countries as ranked by capital-labor ratios.

One would expect, then, that the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. Surprisingly, however, this was not the case in the 25 years after World War II. In a famous study published in 1953. the economist Wassily Leontief (winner of the Nobel Prize in 1973) found that U.S. exports were less capital-intensive than U.S. imports.6 This result is known as the Leontief paradox. It is the single biggest piece of evidence against the factor-proportions theory.

Table 4-3 illustrates the Leontief paradox as well as other information about U.S. trade patterns. We compare the factors of production used to produce $1 million worth of 1962 U.S. exports with those used to produce the same value of 1962 U.S. imports. As the first two lines in the table show, Leontief's paradox was still present in that year: U.S. exports were produced with a lower ratio of capital to labor than U.S. imports. As the rest of the table shows, however, other comparisons of imports and exports are more in line with what one might expect. The U.S. exported products that were more skilled labor-intensive than its imports as measured by average years of education. We also tended to export products that were "technology-intensive,'1 requiring more scientists and engineers per unit of sales. These observations are consistent with the position of the United States as a high-skill country, with a comparative advantage in sophisticated products-

Why, then, do we observe the Leontief paradox? No one is quite sure. A plausible explanation, however, might be the following: The United States has a special advantage in producing new products or goods made with innovative technologies such as aircraft and sophisticated computer chips. Such products may well be less capital-intensive than products whose technology has had time to mature and become suitable for mass production techniques. Thus the United States may be exporting goods that heavily use skilled labor and innovative entrepreneurship, while importing heavy manufactures (such as automobiles) that use large amounts of capital.7

'See Leontief, "Domestic Production and Foreign Trade: The American Capital Position Re-Examined," Proceedings of the American Philosophical Society 97 (1953), pp. 331-349.

7Receni studies point to the disappearance of the Leontief paradox by the early 1970s. For example, see Robert M. Stern and Keith E. Maskus, "Determinants of the Structure of U.S. Foreign Trade, 1958-76," Journal of International Economics 11 (May 1981), pp. 207-224. These studies show, however, the continuing importance of human capital in explaining U.S. exports.

Table 4-3 Factor Content of US. Exports and Imports för 1962

Imports

Exports

Proportion of engineers and scientists in work force

Labor (person-years) per million dollars Capital-labor ratio (dollars per worker) Average years of education per worker

Capital per million dollars

$1,876,000 131 314,321 10.1 0.0255

Source; Robert Baldwin, "Determinants of the Commodity Structure of U.S. Trade," American Economic Review 61 (March 1971), pp. 126-145.

Tests on Global Data. More recently, economists have attempted to test the Heck-. scher-Ohlin model using data for a large number of countries. An important study by Harry P. Bowen, Edward E. Learner, and Leo Sveikauskas8 was based on the idea, described earlier, that trading goods is actually an indirect way of trading factors bf production. Thus if we were to calculate the factors of production embodied in a country's exports and imports, we should find that a country is a net exporter of the factors of production with which it is relatively abundantly endowed, a net importer of those with which it is relatively poorly endowed.

Table 4-4 shows one of the key tests of Bowen et al. For a sample of 27 countries and 12 factors of production, the authors calculated the ratio of each country's endowment of each factor to the world supply. They then compared these ratios with each country's share of world income. If the factor-proportions theory was right, a country would always export factors for which the factor share exceeded the income share, import factors for which it was less. Tn fact, for two-thirds of the factors of production, trade ran in the predicted direction less than 70 percent of the time. This result confirms the Leontief paradox on a broader level: Trade often does not run in the direction that the Heckscher-Ohlin theory predicts.

Tests on North-South Trade. Although the overall pattern of international trade does not seem to be very well accounted for by a pure Heckscher-Ohlin model, North-South trade in manufactures seems to tit the theory much better (as our case study on North-South trade and income distribution already suggested). Consider, for example, Table 4-5, which shows some elements of the trade between the United States and South Korea.

Clearly the goods that the United States exports to South Korea are very different from those it imports in return! And it is also clear that the U.S. exports tend to be sophisticated, skill-intensive products like scientific instruments, while South Korean exports are still largely simple products like shoes. One would therefore expect that the predictions of the Heckscher-Ohlin model might look considerably better when applied to North-South trade than they do for overall international trade. And this turns out to be true in most studies.9

"See Bowen, Learner, and Sveikauskas, "Muiticountry, Multifactor Tests of the Factor Abundance Theory," American Economic Review 77 (December 1987), pp. 791-809.

¥See Adrian Wood. "Give Heckscher and Ohlin a Chance!" Weltwirtschaftliches Archiv 130 (January 1994), pp. 20-49.

PART I International Trade Theory mi Table 4-4 j Testing the Heckscher-Ohlin Model

Factor of Production Predictive Success*

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