Introduction
Many theories of international trade have been developed to explain the relationships between partner nations. Many countries appreciate the need for doing business with others because of the underlying benefits, including faster growth, improved productivity, and innovation (The World Bank, 2018, para. 1). According to Gani (2017, p. 280), nations across the world are increasing the speed of integration within a global system of trading, which is facilitated by maintaining an open economic system and efficient support structures. Among the theories of international trade are the factor-proportions and country-specific theories that address the partners of trade.
The focus of this paper is to compare and contrast these theories. Additionally, a comparison between two selected countries will be done paying attention to the natural and acquired advantages, cultural, economic, and political factors.
Factor-Proportions and Country-Similarity Theories
The factor-proportions theory is an economic model of international trade focusing on production. It was developed by a Swedish economist, Eli Heckscher, and later expanded by Bertil Ohlin, Eli’s former graduate student (Ovsyannykov, 2018; Vjesnik, 2017, p. 353). The factor-proportions theory posits that with all else equal, nations will export goods whose production is intensive due to those factors they have in relative abundance (Zimring, 2019, p. 58; Koch & Fessler, 2020, para. 7).
The theory is based on the assumption that there exists two production factors: labor and capital. Therefore, a country that has relative abundance in one of these factors will tend to export commodities that intensively use the specific factor of production (Zmuk & Josic, 2021, p. 2). Some scholars believe that the factor-proportions theory tends to predict manufacturing trade in value-added (Ito, Rotuno, and Vezina, 2016, p. 427). Such a position can be based on the idea that most factors of production support the production of physical commodities that can be traded across borders. Therefore, the abundance of a factor of production can be a key indicator of products that a country will most likely export.
The country-similarity theory was also developed by a Swedish economist, Steffan Linder. The theory focuses on both intra-industry and inter-industry trade between the partner nations. In essence, the country-similarity theory states that states exchange products in the same or a different industry (Yaw and Keong, 2019, p. 40). In other words, products from a specific industry in one country are traded for products in the same (intra) or different (inter) industries in a second country. Therefore, it implies that the demand and user conditions are the key defining features for this type of trade relationship.
Where the demand for a product is high in one country, the industry can import from another country where the product is also produced and consumed. Country-similarity theory requires that the supply and demand are matched perfectly between the two nations (Liu et al., 2018). Some scholars have investigated the validity of Linder’s hypothesis and found that it applies better at the aggregate level and that income distribution yields better results than the traditional GDP per capita (Kruse, 2020, p. 1076). However, the basic idea is that the two countries have similarities in supply and demand at the sectoral level. In addition, it is the similarities, rather than the differences in factor endowment that dictate the extent to which the two countries can benefit from each other in a bilateral trade arrangement.
Among the visible similarities between the two theories is that they both consider factor endowment for both countries. The demand and supply for a particular product could be determined by the availability of the factors of production associated with its production. In country-similarity theory, sectoral homogeneity means that the demand and supply are alike between the partner nations (Kruse, 2020, p. 1078).
Such a proposition can also be interpreted to mean that two countries are well-endowed with certain factors of production to support the underlying demand and supply. The factor-proportions theory also supports the idea of factor endowment between two countries. An abundance of one factor means that the country can fill gaps in the partner state where the demand for associated products is higher and endowment is lower. Another similarity is that the theories apply to any two countries engaging in bilateral trade. In other words, the two countries have to engage in trade dictated by the factors of production comparable to each other. There is hardly any evidence considering the case for more than two countries engaging in multilateral trade.
The main difference between the factor-production and country-specific theories is the inverse nature of the relationship between the country’s endowment. In other words, the factor proportions theory holds when one country is better endowed with a production factor than the partner, which creates a gap in production that can be filled through bilateral trade. As explained earlier, the factor-proportions theory requires that a country exports goods that depend on a factor for which the specific country has in abundance Zimring, 2019, p. 58). On the contrary, the country-similarity theory applies when the trade partners exhibit similarities in the demand and supply patterns associated with a specific product. In this case, trade is made possible because the two countries can support each other and that the goods produced in one can easily be consumed in the other.
Additionally, the focus on production factors in factor-proportions theory and demand and supply patterns in the country-similarity theory can be considered a major difference between the two. However, it is important to acknowledge that even the demand and supply for a commodity will depend on the factors of production. An argument can be made that consumers are aware of the existence of a product, which explains their consumption patterns. The availability is subject to the factors of production, which also implies that the two partner countries could have similar endowment levels to allow bilateral trade to take place. Therefore, the main difference remains the fact that one requires a different level of endowment while the other uses the similarities.
Comparison between two Countries
The two countries under comparison are Canada and the United States, two north American nations that engage in bilateral trade. The volumes of international trade can be illustrated by 2019 figures where the states traded approximately $718.4 billion. This volume can be categorized into two: imports and exports comprising $360.4 and $358.0 billion respectively (US Trade Department, n.d., para. 1). These figures indicate that Canada and US are some of the best case examples where such aspects as natural and acquired advantages can be explored, alongside the political, cultural, and economic similarities.
Natural and Acquired Advantages
The term natural comparative advantage implies the advantage in the context of international trade emanating from natural resources that a country has and that can be used in the production of goods and services. Many countries that involve in international trade depend on the exchange of goods for those products they obtain naturally (Davis, 2021, para. 7). Examples include natural gas and oil. On the contrary, acquired comparative advantage emanates from deliberate efforts by a country to build the advantage through spending time and resources. For example, a country that invests in production technology and equipment can gain an edge over another that has not made the same investments.
In Canada, oil and natural gas are the country’s biggest commodities by value. Recent statistics indicate that Canada gained $102 billion in 2019 from the export of such commodities as natural gas, bitumen, crude oil, and natural gas liquids (Quan, 2020). The United States remains a major customer for Canada’s oil despite the growing shale production domestically. In this case, Canada has a natural comparative advantage over the US.
The reverse relationship is hardly observable because the US exports manufactured goods that do not necessarily reflect a natural advantage or a greater resource endowment compared to Canada. For example, the US exports machinery, electrical machinery, mineral fuels, plastics, and vehicles to Canada (International Trade Administration, 2021). As such, it is apparent that the US exports manufactured products ready for use, which can explain an acquired advantage. The manufacturing industry in the United States is more advanced than in Canada, which gives the US an acquired comparative advantage. The argument is that the US has deliberately invested in the various manufacturing sectors that enable it to produce goods more effectively. Such an advantage means that Canada can benefit from lower acquisition costs as compared to building the production capacities domestically.
Economic Similarities
The economies of both the United States and Canada have several similarities, especially regarding growth patterns and the major economic activities. First, both economies have market-oriented economic systems and similar production patterns, as well as affluent standards of living. In Canada, growth in mining, manufacturing, and service sectors was witnessed after World War II, which transformed the country from a rural to an industrial and urban economy. Similarly, the US comprises a large private sector that has historically spearheaded developments in such industries and sectors as aerospace, medical, and military equipment. Both countries are also well-endowed with natural resources, including natural gas and crude oil. The trade between the two also involved an exchange of these and related products.
Canada and the US also rely heavily on international trade, which includes trade agreements with other major North American economies. For example, the 1989 Canada-US free trade agreement allows the two countries to trade freely, while the 1994 NAFTA agreement also included Mexico. Therefore, market liberalization is a common characteristic of both inherently capitalist economies. Lastly, both have well-established and strong financial markets characterized by strong and relatively stable currencies traded on the global foreign exchange markets. As recognized first-world countries, Canada and USA are key players in the international economy.
Cultural Similarities
Canada and the USA are some of the countries in the world that are culturally similar in multiple ways. Though not identical, several cultural aspects could be considered similar. For example, citizens of both countries have a strong sense of patriotism and pride towards their countries as illustrated by their tendency to clothes with their countries’ flags on them (Wolters World, 2018, para. 6). According to Chow (n.d., para 7), Hofstede’s framework can be used to assess the cultural differences between the two countries, from which observations made illustrate extreme closeness.
For example, power distance in Canada is at 39 while the USA stands at 40 on the scale. Other aspects include individualism, masculinity, uncertainty avoidance, indulgence, and long-term orientation with Canada and USA scoring 80 versus 91, 53 versus 62, 48 versus 46, 68 versus 68, and 36 versus 26 respectively. The minor differences show national cultures that resemble one another. To illustrate the similarity, such countries as South Kores score 100 on the long-term orientation scale as compared to 36 and 26 for Canada and USA.
Political Similarities
The political similarities between USA and Canada are fewer, especially considering that the two nations have dissimilar governments. For example, the USA is led by a president while Canada, which is a commonwealth state, is led by a prime minister (Booth, 2018, para. 3). However, such political aspects as democracy and universal suffrage are similar. The countries are also subdivided into smaller political units where provinces and states in Canada and USA respectively are headed by the regional government. Both countries also subscribe to the maxims of federalism despite each having distinctions from the other. Political parties are the main avenues for leaders to ascend to power.
Conclusion
The essay has explored the theories of factor-proportions and country-similarities and highlighted their differences and similarities. A key observation is that the two theories require two countries to be partners in the trade where factor-proportions apply when one has an abundance of the factors of production. Country-similarities theory works where the partner nations exhibit similar patterns of supply and demand. A comparison between the United States and Canada has been made concerning economic, cultural, and political factors.
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