Working Paper: NBER ID: w16105
Authors: Lawrence Edwards; Robert Z. Lawrence
Abstract: Concerns that (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech. \n\nJudged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes--developed country products are far more sophisticated. \n\nThis generalization is already recognized in the literature but it does not hold for all types of products. Export unit values of developed and developing countries of primary commodity-intensive products are typically quite similar. Unit values of standardized (low-tech) manufactured products exported by developed and developing countries are somewhat similar. By contrast, the medium- and high-tech manufactured exports of developed and developing countries differ greatly.\n\nThis finding has important implications. While measures of across product specialization suggest China and other Asian economies have been moving into high-tech exports, the within-product unit value measures indicate they are doing so in the least sophisticated market segments and the gap in unit values between their exports and those of developed countries has not narrowed over time. \n\nThese findings shed light on the paradoxical finding, exemplified by computers and electronics, that US-manufactured imports from developing countries are concentrated in US industries, which employ relatively high shares of skilled American workers. They help explain why America's nonoil terms of trade have improved and suggest that recently declining relative import prices from developing countries may not produced significant wage inequality in the United States. Finally they suggest that inferring competitive trends based on trade balances in products classified as "high tech" or "advanced" can be highly misleading.
Keywords: High-Tech Trade; International Specialization; Wage Inequality
JEL Codes: F1; F11; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| developed and developing countries export fundamentally different products (O10) | lack of direct competition (L19) |
| differences in unit values (D46) | developed country products are far more sophisticated (O57) |
| China's increased high-tech exports (L63) | occupy the least sophisticated segments of the market (L19) |
| improvement in the US terms of trade (F14) | declining relative prices of manufactured imports from developing countries (F14) |
| declining relative prices of manufactured imports from developing countries (F14) | no significant wage inequality in the US (J31) |
| trade balances in high-tech products (F14) | misleading conclusions about competition and substitution (L13) |