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Go Beyond Comparative Advantages Traps

Author: BaiYingZi
Tutor: JiYuShan
School: Jilin University
Course: Western Economics
Keywords: Comparative Advantages Comparative Advantages Traps Comprehensive Competitive Advantages Institutional Innovation
CLC: F752.7
Type: PhD thesis
Year: 2008
Downloads: 1180
Quote: 6
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Since reform and opening up, the strategy of China’s international trade has based on the comparative advantage theory. The implementation of this strategy has greatly promoted the economic growth of China. According to statistics, the volume of China’s international trade was only US$ 20.6 billion in 1978, but in 2007 this figure reached US$ 2.17383 trillion. In the same year, China ranked the third from the 32nd in 1978 in international trade, only after the United States and Germany. Stimulated by the development of foreign trade, China’s economy showed a rapid growth: the GDP increased to RMB 24.6619 trillion in 2007 from RMB 362.41 billion in 1978. However, the rapid growth of GDP has not brought a corresponding increasing level of wages of the people, and the loss of national interests has become rather serious. Comparing with the developed countries, China’s per capital GDP is still low. The problem we are facing is that the traditional comparative advantages are being weakened, the trade friction is increasing, and the overall profit is declining. All of these are reducing the trade competitiveness. It is difficult to maintain a high-speed growth of China’s foreign trade. More seriously, the conditions of trade had emerged a deteriorating trend. China’s foreign trade maybe has a risk of "comparative advantage trap". The dominant theory to explain the existence of international trade and trade interests is the comparative advantage theory, which is divided into traditional and modern theory of comparative advantage theory. From Adam Smith to Ricardo’s theory of comparative advantage, and to the expansion of the Ricardian’s system, the traditional comparative advantage theory formed a complete theory system. Traditional comparative advantage theory is built on the comparative advantage of the industry of a country. The common characteristic of these theories is that all of them think the price or cost differences as the main reason of international trade. The performance for the general pattern of comparative advantages is that the developed countries import labor-intensive or natural resources-intensive products and export capital or technology-intensive products, and the developing countries are on the contrary. With the support of free trade, each country can benefit from trade. A country’s wealth growth is not the loss of other countries, and free trade is not a zero-sum game. This can explain some international trade of natural resource-intensive products. However, there is a limitation in the traditional theory of comparative advantage: both the comparative advantage theory basing on differences in labor productivity and the H-0 theory basing on the supply of production factors are all using static analysis methods. They all use the abstract inflexible and solidification static analysis methods to analyze the complex and changeable economic situations. The terms of relative interests in countries are based on the unchanged conditions of the production and supply, unmoved factors of production, and perfectly competitive market conditions. In theory, these assumptions are acceptable, but in practice they have major flaws. This series of assumptions has gone out of the reality of the economic environment. According to the theory of comparative advantage of international trade, the developing countries will always produce labor-intensive production and export of low value-added products, until the developed countries upgrade their industry structure, it will be possible to transfer the backward industries from developed countries to developing countries.In fact, after the Second World War, although the basic pattern of international trade remain largely determined by the state’s technical differences and natural resources, the reality of international trade shows a new phenomenon between the countries with same per capita national income, labor productivity and natural resources. Since the 1960s, many economists developed various theories to explain the new situation of the world trade. Modern comparative advantage theory explains the facts not only from the perspective of supply, but also from the perspective of demand. Its core is the endogenousment of the comparative advantage. These theories improve andexpand the traditional comparative advantage theory from different angles.Modern comparative advantages broke through the assumptions ofperfect competition, which has the endogenous dynamic characteristics, and is more close to the real world. It will not only explain the direct trade among developed countries but also the developing countries. The common feature of modern theory of comparative advantage is attempt to endo and dynamic the comparative advantage and trade structure. However, firstly, these models are lacking of systematic and general, and have not developed into a consistent theoretical analysis framework. Secondly, the modern theory of comparative advantage is formed and promoted in the developed market economy countries, basing on those developed countries’ interests. These theories based on the sound basic market system, to inspect from the nature market economy rather than that of developing countries. Some terms that may be beneficial to developing countries have not been mentioned. Thus the theory lacks specificity and applicable meaning to developing countries. Both traditional comparative advantage theory and modern theory of comparative advantage emphasize that different countries may benefit from the international trade. The comparative advantage can become a competitive advantage and triggered the economic variables of foreign trade. In the initial stage of economic development, the foreign trade did promote the development of developing countries. It is proved that, although the developing countries gain some interest from the international trade, the economic gap between the developed and developing countries has not been reduced, and even further. Blindly following the comparative advantage theory will put developing countries into comparative advantage traps.For a long time, in the strategy of international trade, China has mainly taken the comparative advantages to develop labor-intensive industries. In the early stages of economic development, international trade has developed rather rapidly. With the expansion of the scale of international trade, China’s export volume of the industrial manufactured goods occupied 94.5% of the total. However, the export of finished products still has a relatively unique "one high and one low" ("high" means the high proportion of labor-intensive products, and "low" refers to the low contented of high-tech and high value-added ) features. The international competitiveness of technology and capital-intensive products is still low. Meanwhile, the competitiveness of labor-intensive products in the international market is declining, the "comparative advantage" can not be called "advantages", the terms of trade is deteriorating, and export is difficult to enhance efficiency. It has a risk to fall into the "comparative advantages traps". The comparative advantage in trade strategy is becoming more and more discomfortable. The fundamental reason lies in China’s long-term trade structure, which only exports low value-added products under the comparative advantage, and makes international trade in a disadvantageous position. Its specific performance is that: in the export of industrial manufactured goods, the export of labor-intensive products accounted for more than 80% of the total volume, which is much higher than the average level of the world. The processing trade occupies too much proportion in China’s export contribution and is still on the low-end of the international industrial chain. The proportion between the export of cargo trade and service trade is seriously out of balance. The export ratio of foreign-invested enterprises is too high in China’s total export, which is lowering the terms of trade. Tariff system is far from perfect, international trade protectionism is being intensified and the law which maintains fair competition in the market environment is lagged. To resolve the above mentioned problems, we must formulate the appropriate trade strategy basing on the real conditions withChinese characteristics.The comparative advantages of countries are constantly changing. Having the comparative advantage does not mean the competitive advantage. The main purpose of international trade is to meet each other’s needs according to the comparative advantage. An important feature of modern international competition is that each country (including many developing countries) enters the international market to obtain greater international trade interests. As the above analysis has shown, the comparative advantage is not adaptive to China’s economic development strategy. As the main content of the knowledge industry, the status of high-tech industries in the national economy is rising rapidly, industrial structure is rapidly knowledgeable, and knowledge gradually becomes competitive signs and the main source. Some scholars believe that China should take a competitive advantage theory as a guide of trade, and the micro-enterprises should play the main role. However, the author in this paper thinks that, because of the blindness of market regulation and the imperfection of the market system, in a developing country, micro-enterprises have not yet formed strong core competitiveness. Completely guided by the market, they can not necessarily jump out our comparative advantages traps. Therefore, if we want to get rid of the excessive reliance on export of labor-intensive products, we should form the comprehensive competitive advantage as following to take the place of the competitive advantage theory: to strengthen the role of the government, to form institutional innovations as the core, to incentive the technological innovation as the main line, to take the human resources development and factor endowments as the support, with the strong role of macroeconomic regulation and control to protect and let the market fully display the foundational function in resources deployment. With the comprehensive competitive advantage as the guide, we can change the comparative advantages of their products into comprehensive competitive advantages, go beyond comparative advantages traps, and promote the development of international trade.China’s basic national conditions decide the inevitability of the "comprehensive competitive advantage". China’s unique cultural background is helpful in forming the comprehensive competitive advantages, the government-led innovation system is helpful in constructing the competitive advantage by saving the transaction costs, the active and effective macro-control provides a sound system safeguard for the comprehensive competitive advantages by creating a good environment for the development of enterprises, and taking the road of new industrialization through gradual reform will make China finish the transition from the comparative advantage to comprehensive competitive with better development of foreign trade.Therefore, in order to make China to participate in international division of labor and trade more efficiently, and play a more important role in the international trade in the future, it is necessary to break the shackles of traditional trade theory and go beyond the "comparative advantages traps". On one hand we should continue to give play to the comparative advantages, speed up the pace of industrial restructuring, vigorously promote technological innovation, and let the market fully play the role of its efficiency in resource allocation. On the other hand, as a large developing country, China should actively implement the role of the government in constructing the comprehensive competitive advantage, speed up institutional innovation, innovate the government system, build a systemic stability system, enable the country’s overall competitive advantage with a historic undertaking in conjunction with the strategy of national sustainable development, transform the comparative advantages into competitive advantages through multi-angle and systematic institutional arrangements, enhance the country’s overall competitiveness, improve the negotiation ability in foreign trade, and control the words power and initiative rights in the international trade to protect the national interest and benefit.In summary, we should set up the following institutional arrangements to go beyond the "comparative advantages traps". First, continue to display the function of comparative advantage. It is necessary to further optimize the structure of import and export commodity, increase the technique content of the export of labor-intensive products, accelerate the development of export of high value-added products, control the goods of high energy consumption, high pollution and resource-type products export, increase the import of energy goods, raw materials goods, as well as the goods of advanced technologies and key equipment, speed up the transformation of processing trade, and increase the proportion of export in service trade. Secondly, we should formulate the trade institutional arrangements facing the world, to realize the diversified foreign portfolio and steadily promote the gradual revaluation of RMB. Thirdly, we should formulate rational industrial policy to accelerate the pace of industrial structural adjustment, establish the new leading industries, realize the optimized promotion of industrial structure, and improve the international competitiveness of export products. Fourthly, we should perfect the foundational institutional arrangements such as the market system construction, to vigorously promote technological innovation, establish technology development strategy, improve legislation and various organization system, deepen foreign trade system reform, promote enterprise-scale operation, and strengthen the construction of profession associations to coordinate the development of trade. In brief, the government should fully play the role in constructing the comprehensive competitive advantages, implement the strategic trade policies, formulate the rational investment policy to promote rationalization of the industrial structure, perfect the basic institutional arangements, protect national interest and in the end, transform the comparative advantages into comprehensive competitive advantages.

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CLC: > Economic > Trade and Economic > States foreign trade > China's foreign trade > Trade relations with other countries
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