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Vertical Comparative Advantage

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Despite being the cornerstone of trade theory, the concept of comparative advantage remains an empirically and operationally weak concept. Typically invoked as the rationale for and of trade proper, comparative advantage is rarely ever described in any detail, let alone measured and tested. This article examines the “problem” of comparative advantage and explores alternatives. Specifically, in light of recent findings regarding the very nature of trade (e.g., its vertical nature [Hummels, Rapoport, and Yi 1998; Hummels, Ishii, and Yi 2001; Lüthje 2005, 2006] and the increasingly global nature of value chains), the concept of horizontal (sector, good) comparative advantage is abandoned in favor of vertical comparative advantage, defined over individual links or strands of links of a given value chain. Regions/countries (region/country) are assumed to have vertical comparative advantages, not horizontal comparative advantages. For example, 19th century Great Britain had a vertical comparative advantage in processing cotton and silk from its colonies, not in textiles per se (horizontal comparative advantage). Today, Japan has a similar vertical comparative advantage in the transformation of imported intermediate goods. The result is a more complete theory of comparative advantage, one that is testable, amenable to policy analysis, and sufficiently general to include existing approaches as special cases.
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Keywords: commercial policy; comparative advantage; value chain

Document Type: Research Article

Affiliations: Department of Economics, Université Laval, Québec, Canada

Publication date: July 1, 2011

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