International Trade Heckscher-Ohlin-Samuelson Model - Essay Example

Study for international trade HOS model INTRODUCTION The Transatlantic Trade and Investment Partnership (TTIP) is an investment and trade agreement within the United States (US) and European Union (EU), which was enacted with the objective to remove the barriers of trade in various sectors so as to ensure that the process of purchasing and selling goods is much easier within the US and the EU (Deardorff, Stern and Baru, 318-350). Correspondingly, to gain an in-depth understanding of the trade relations between the US and the EU, the HOS theory and the Stolper-Samuelson theorem have been used to explain the impact of TTIP. The HOS theory provides an explanation of the trade patterns, which is different in various countries in relation to the factor endowments. It is worth mentioning in this context that HOS is based upon the assumption that two countries have differences in their factors of production wherein a developing country is labor intensive and developed country is capital intensive. According to this theory, a country will export its products to avail the cheap factors of production from a country and import those products that are scarce in its nation. Likewise, Stolper–Samuelson theorem provides an explanation regarding the relationship between the prices of output and the factors of production in relation to the wages and return on investment (Deardorff, Stern and Baru, 318-350). The paper hereby intends to describe the impact of TTIP on trade flows, prices and allocation of resources within the EU and the US. It also highlights the extent to which, HOS theory and Stolper–Samuelson theorem has contributed to understand the impact of trade. Finally, it explains whether Krugman’s theory is better in understanding the impact of trade through a comparative elaboration in context of the HOS theory and the Stolper–Samuelson theorem. Correspondingly, for the sake of simplicity in the elaboration of the concerned issue, illustrations will be drawn from the automotive industry and the agricultural industry. IMPACT OF TTIP TTIP was framed with an idea to initiate economic growth both in the EU and the US along with creating job opportunities. It has been predicted that TTIP would boost the economy of the EU by 120 billion Euros and likewise, the US economy would be boosted by 90 billion Euros. As revealed in a recent report, once TTIP is completely implemented, the GDP of Europe would be boosted by 0.5%, equivalent to 120 billion Euros on an annual basis (European Commission, 2014). TTIP has resulted in creating a good trade relationship between the US and the EU with the removal of trade barriers and reduction of tariff costs levied on the commodities being imported or exported (Hunter, 2013). For example, the manufacturing standards of both the EU and the US, as witnessed, have significantly improved due to TTIP over the recent years. It is believed that the agreement boosted the total car exports of the UK to the US that further assisted the UK automobile industry to gain a growth margin of double digit in its recent performances. It was projected that with the initiation of TTIP, the export of motor vehicle and car components in the UK would have a growth of 25% wherein the overall import of resources from the US would be 7% simultaneously. It was witnessed that there was a 71% growth in the vehicle exports to the US, manufactured in the EU and 149% growth in the EU export of car components in the US (Hunter, 2013). These figures provide evidences that the HOS theory does not suffice to the TTIP agreement created within the EU and the US, as it has been observed that the EU has employed more factors of production such as raw materials, labor and land for manufacturing vehicles as compared to the US, which has merely employed its capital or investment for importing the products manufactured in the EU. In relation to the trade flows in the present day context, the US has been regarded as one of the largest importers of vehicles from the EU at a share of 23% of the net EU automotive imports. Moreover, due to the initiation of TTIP, it has been viewed that the US has become the best destination for the EU to export the produced vehicles based upon the units exported and the value of exports. Stolper-Samuelson theorem is further observed as based on the assumption that the number of factors for production would be equal to the number of products. Nonetheless, it can be asserted from the aforesaid statistics that the number of factors used by the EU in order to produce vehicles is more as compared to the number of factors used by the US so as to import the vehicles manufactured in the EU (ACEA, 2014). Likewise, in relation to the agricultural industries in the TTIP agreement, it has been revealed that the US is the largest economy for exporting agricultural products wherein most of the framers in the US depend on exporting agricultural products to maintain their livelihoods. Moreover, it was witnessed that in the year 2013, the US exports related to food and agricultural products reached its highest peak that accounted to a value of 145 billion US dollars (The Office of the U.S. Trade Representative, 2013). Accordingly, in the same year, the US agricultural exports to the EU were valued at 10 billion US dollars, which was relatively lower. Thus, the main objective for the US in the TTIP agreement was to eliminate the trade barriers and increase the rate of exports in relation to agricultural commodities. Eliminating these barriers would reduce the extent of duties being imposed on agricultural products for farmers in the process of shipping these products in the EU. In addition, producers of olive oil in the US would also benefit from this agreement since the export of olive oil products in the EU is subjected to high duties while the trade barrier is imposed. Correspondingly, it can be stated that through TTIP, farmers and their families in the US would be able to obtain substantial benefits along with providing quality assured agricultural food products to the EU (The Office of the U.S. Trade Representative, 2013). CONTRIBUTION OF H-O-S THEORY AND THE STOLPER-SAMUELSON THEOREM TO UNDERSTAND THE IMPACT OF TTIP In relation to the contribution of HOS theory and Stolper–Samuelson theorem in understanding the impact of TTIP, examples from automobile industry and agricultural industry have been considered. From the aforesaid study, it can be revealed that the assumption of HOS theory that is 2×2 assumption in relation to automobile industry after the TTIP agreement got initiated does not suffice the assumption. This is because there had been a steady growth in the export of UK manufactured motor vehicles and car components to the US wherein there was a growth of 71% in the vehicle exported and 149% growth in the car components exported to US. Thus, in this case, the HOS theory and Stolper-Samuelson theorem cannot be applied because EU has been using its labor, land and resources to produce the vehicles and its components; while on the other hand, the US has been only using its capital to import these products from the EU. Therefore, it can be asserted that HOS theory and Stolper-Samuelson theorem does not provide contribution in understanding the impact of TTIP. This is because the factors production used by EU in production and export of the motor vehicles to US is more as compared to the factors of production used by US in importing automobile products. Similarly, in relation to the agricultural products, TTIP agreement has made a huge impact by way of benefiting the US to export its agricultural products in the EU that was not subjected to export duties and the EU could avail these quality assured products (The Office of the U.S. Trade Representative, 2013). This aspect provides evidence that the assumption of HOS theory has been sufficed because the US had employed its land and labor to produce the agricultural products along with exporting it and the EU had employed its capital and resources to import these agricultural products which supports the 2×2 assumption. CONTRIBUTION OF KRUGMAN’S THEORY IN EXPLAINING THE IMPACT OF TTIP Krugman’s theory is based upon the assumption of constant returns to scale, which implies that when the input used for production increases in a constant rate, the output produced will also have a proportionate change that is the output produced will also have a constant increase (Krugman, 1991). Accordingly, it can be stated that with the initiation of TTIP within the EU and the US, there has been a rise in the number of input used for producing motor vehicles along with a substantial rise in the number of output produced that has been exported by the EU to the US. Illustratively, it can be asserted that the factors used for the production by the EU in the automobile industry are equal to the output derived from producing these motor vehicles. Moreover, the export and import practices used by the EU and the US in relation to automobiles have constantly increased with the increase observed in the production quantity. Likewise, in relation to agricultural products, it has been observed that TTIP has resulted in the US, exporting more agricultural products to the EU, which in turn has benefitted both the counterparts as US farmers are obtaining increased gains by exporting agricultural items while simultaneously, the EU is benefited with the import of quality food products (The Office of the U.S. Trade Representative, 2013). Therefore, it can be asserted that Krugman’s theory is sufficed in the TTIP agreement for agricultural products as the input used for producing agricultural products by US in equal to the output obtained for exporting these products to the EU. On the whole, it can be affirmed that Krugman’s theory provides a better understanding about the impact of TTIP in automobile and agricultural industries in comparison to HOS theory and Stolper–Samuelson theorem. CONCLUSION TTIP is referred to the trade agreement within the US and the EU, which has resulted in removing trade barriers in export and import of products across numerous sectors and has ultimately made the process of resource channelization simpler within the EU and the US. TTIP has been framed to boost economic growth in the US and the EU simultaneously creating better employment opportunities. For example, with the initiation of TTIP agreement, in relation to automobile industry, it has been viewed that HOS theory and Stolper-Samuelson theorem does not get sufficed to the factors of production employed by the EU. This is because the labor, resources and land for producing and exporting automobiles is comparatively more than the capital employed by US that is capital for importing automobiles form EU. On the other hand, in relation to the agricultural industry, it can be stated that both HOS theory and Stolper-Samuelson theorem provides a proper understanding regarding the impact of TTIP as the factors of production used by the US in producing and exporting agricultural products such as land and labor, is equal to the factors used by the EU in importing agricultural products using capital and financial resources. Alternatively, it was observed that Krugman’s theory provides a better understanding regarding the impact of TTIP in automobile and agricultural industry in comparison with the HOS theory and Stolper–Samuelson theorem as it is based upon the assumption of constant returns to scale, which appropriately fits in the TTIP agreement between the US and the EU. Works Cited ACEA. International Trade. 2014. Web. 1 Apr. 2014. Deardorff, Alan V., Robert Mitchell Stern and Sundari R. Baru. The Stolper-Samuelson Theorem: A Golden Jubilee. [United States].University of Michigan Press, 1994. Print. European Commission. About TTIP. 2014. Web. 1 Apr. 2014. Hunter, Daniel. EU-US Free Trade Agreement to Benefits UK Car Industry. 2013. Web. 1 Apr. 2014. Krugman, P., 1991. Increasing Returns and Economic Geography. The Journal of Political Economy, Vol. 99, No. 3, pp. 483-499. The Office of the U.S. Trade Representative. U.S. Objectives, U.S. Benefits In the Transatlantic Trade and Investment. 2013. 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