Vertical Comparative Advantage

Publication Type: 
Volume: 
25
Number: 
3
Page Numbers: 
305-348
Published On: 
2011

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, D., Rapoport, D. and Yi, K.-M. 1998. Vertical Specialization and the Changing Nature of World Trade. Federal Reserve Bank of New York Economic Policy Review, 4: 79–99.; Hummels, Ishii, and Yi 2001; Lüthje 2005Lüthje, T. 2005. Vertical Specialization Across Developed Countries. The International Trade Journal, 19(3): 193–216.[Taylor & Francis Online], 2006 Lüthje, T. 2006. Vertical Specialization Between Developed and Developing Countries: A Modification of the Heckscher-Ohlin Model. The International Trade Journal, 20(4): 407–427.[Taylor & Francis Online]] 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.