Trade Models

Predictions: Theory versus Empirics

 The Mineral Fuels Trade as a percentage of Total Trade:

• Year 2005 is evident to be a turning point as Mineral Exports of Mexico and Argentina began to fall.
• With falling Exports and steady rise in Mineral Imports, both countries lost their status of net exports in 2015
and 2010 respectively.
 Gravity Model:

• gravity model suggests that countries with higher GDP and lesser distances trade more.

• The following graphs show the Argentina’s export pattern with its export partner countries.
• After 2010, Brazil became a leading mineral producer which explains export down
trend from Argentina’s perspective.
• For Paraguay, it imports 4 times more from Brazil than Argentina, so trend has
stayed stable. In China’s case, it relies more heavily on mineral imports (Zhang
Hui, global times).
• Moreover, US relied more on exports from Canada, Venezuela and Chile on Brazil
and Colombia so we see a downtrend in exports after 2005.
 But why did mineral exports decline?
The above graphs use import pattern to explain that.
• Despite no gas reserves, Paraguay has risen in transnational investments, joint
ventures and government owned industries for which it became exporter to
Argentina and other countries.

• Also, Bolivia is mineral abundant country which hasn’t used even 10% of its
resources in last 500 years of mining. (Bolivia Mining, export.gov) Perhaps,
North Sea Oil Discovery of 1964 stayed more government regulated
Netherlands, so it rose in its exports later than UK.
The case was not much different for Mexican
imports as figures below show.
• Netherlands still stand as exporter to Mexico.
• In case of Canada, it has maintained global leader status for mineral
exports. However there has been quite a volatility in mineral prices in last
decade reaching a hike in 2011 and hitting a low in 2016.
• That’s why we observe a rise and fall in Mexico Mineral export expenditure
from 2011 to 2016 respectively.
• Moreover, US rising exports can be attributed to offshoots of US Shale
Revolutions and government initiative to reduce mineral import reliance.
Mexico exports can be seen in the following
graphs.
• In Japan, various government organizations like MITI, MMAJ and METI
promoted overseas exploration specially in Mongolia, Chile, Brazil and Mexico
which accounts for rising mineral exports from Mexico.
• “To realize the vision of ‘Make in India’, we have to ‘Mine in India’. (Dash, n.d.)
• Hence India needs to satisfy its needs by importing from Nigeria, Qatar, UAE
and Mexico.
• Moreover, Spain is abundant in natural resources, so they hardly require
importing which accounts for straight low trend.
Conclusions from Gravity Model:
• From the above analysis, we see that countries export mineral fuels which are
abundant in mineral resources.
• Even if they don’t have enough extraction equipment, foreign firms and
governments invest in their economy.
• However, lack of mineral mineral resources can’t lead to mineral exports despite
higher GDP or lower distance. For instance, Paraguay is neighbor to Argentina but
there is low inter country trade as both are self-abundant.
• Also, US imports not only because of higher GDP but because it is abundant in few
resources and scarce in others which Mexico, Argentina and other countries are
abundant it.
• Hence gravity predictions don’t fit the data well.
 Ricardian Model:

According to the Ricardian model, a country is net exporter of a product if it enjoys lower
production opportunity cost than other countries. The above table depicts the concept using
ratio which refers to the percentage of country’s mineral export as a fraction of percentage of
world’s mineral export.
• In theory, the ratio for net importers should be lesser than 1 and greater than
1 for net exporters.
• Since both countries have value lesser than 1, the model predicts that they
should be net importers.
• The empirics show countries like Russia, Saudi Arabia and Canada are net
exporters and others like Mexico and Argentina are net importers
• Therefore Ricardian Model fits the data accurately.
 Specific Factor Model:

• The above analysis suggest that Mexico and Argentina are net importers of
Mineral Fuels as per 2015 data.
• According to the model, Mineral fuel is a capital and land intensive industry.
In pre-trade conditions (autarky), the mineral land lords (land owners) and
mineral extraction equipment holders (capital owners) were earning higher
income due to higher prices.
However, after free trade, their incomes fell because prices in local market
reduced due to access of low import prices.
Also, labor has ambiguous effects because it is a mobile factor.
Moreover, as imports exceed exports, mineral fuels might be considered as an
“import competing industry” for Mexico and Argentina.
Hence, SFM suggests that labors will move from mineral fuel to other export
competing sectors such as road vehicles, telecom and office machines in Mexico
and animal feed, cereals and oil seeds in Argentina.
 Heckscher Ohlin Model (HOM):

• According to HOM, countries differ in trade patterns due to factor endowment differences.

• As per its capital requirement, Mineral Industry is considered as highly capital intensive in
addition to that of its land. Mexico and Argentina are fortunate to have abundant land resources
but lower capital resources – due to lower fixed capital formation as compared to world.

• Mexico has 22.5% of 2015 GDP while Argentina has 15.56% and World has 23.47%.

• Therefore, HOM predicts that both countries will import and in agreement to this, the empirical
evidence shows both countries as net importers hence the model fits data.
 Standard Trade Model
• Mineral industry is dominated by China, Canada, Saudi Arabia, India and Brazil therefore an
average country has a 0.61% of share in mineral exports as per 2016. Mexico has 1.25% and
Argentina has 0.098%. From 2016 to 2017, Mexico has grown its mineral exports by 24.2%
however Argentina only grew by 1.69% (Data extracted from Comtrade)

• Meanwhile the TOT of Mexico rose by 2.1% of Argentina fell by 1.2%. Certainly, the Mexico’s
welfare is rising as compared to Argentina.

• Since Mexico has higher than average share in world mineral exports and is growing, Mexico may
be facing an export led growth. Whereas Argentina shares a lower than average export
contribution in world and declining mineral exports.

• Therefore, Mexico follows the condition of export led growth while Argentina does not in context
of Standard Trade Model.