Bruce E. Moon William J. Dixon
Dept. of Int'l Relations Dept. of Political Science
Lehigh University University of Arizona
International trade occupies an interesting position at the nexus of theory and policy in international relations. The theory of international trade is rooted in one analytic tradition, largely prescriptive and illustrative, while the policy questions are rooted in a completely different analytic tradition, largely explanatory and concretely empirical. Our ultimate goal is to bring these two facets of international trade together to gain some insight into the patterns evidenced in the global distribution of U.S. exports. The present paper takes an initial, if somewhat modest, step in that direction by untangling the substantive implications underlying what is probably the most widely used approach for empirically modeling international trade flows. Specifically, we examine the so-called gravity model of trade in the context of American exports to 88 importing countries from 1970 to 1990. The following analysis will show how the gravity model can mask certain theoretically meaningful and policy-relevant features of trade flows relating directly to import shares and import openness. Our claim is not to deny the utility of gravity models for some purposes but rather to highlight the utility of decomposing the gravity formulation. Throughout our principal question concerns why American export success has varied with potential trade partners and over time.
Theory and Policy in International Trade
On the one hand, trade policy questions are lodged in a state-centric ontology of national interactions in which governments are the major actors. The issues involve the goals of states—employment and growth, payments balances, relative gains of power, wealth and influence, and challenges to policy autonomy and effectiveness posed by interdependence. The targets of these issues are state policies believed to distort the volume and composition of trade in ways that differentially affect the interests of different nations. Thus, one might reasonably expect that the empirical theory of modern international trade would consequently be rooted in the familiar perspectives of foreign policy analysis.
Instead, international trade theory remains locked in the Ricardian tradition, which focuses upon the motivations of private economic actors facing an environment devoid of political actors or extra-economic goals. Efforts to introduce the political dimension have been sporadic and partial, consisting mostly of layering on top of traditional economic theory addenda which marginally alter the fundamental analysis or suggest exceptions which narrow the scope of the theory.
The clearest example of this disjuncture is the way that the basic data of international trade—individual transactions—are aggregated for the purposes of analysis. Sattinger (1978: 22) notes, for example, that "economists [emphasis added] studying international trade are typically more interested in explaining ... which goods are exported ... than the total magnitude of trade between two particular countries." He further observes, "This emphasis is natural [emphasis added], as more interesting qualitative conclusions can be drawn about [commodity] patterns of trade than about [partner] magnitudes." Such an orientation retains the focus on the sectoral or commodity composition of trade which has informed orthodox trade theory since at least the time of Adam Smith. The outstanding exemplar of this tradition is the Ricardian theory of comparative advantage that addresses the question of which products should compose the imports and exports of a given country. Until very recently, the literature of international trade theory has experienced a continuing sophistication of answers to this same basic question, most notably with Heckscher-Ohlin's sharpening of the concept of "national advantages" with the advancement of a factor proportions - factor intensity model.
However, we disagree with Sattinger's contention that this way of framing the problem of explaining trade flows is somehow "natural". Instead, its origins are to be found in the policy questions which dominated the formative period of liberal trade theory, particularly the role of the Corn Laws in reducing British agricultural imports and manufactured exports in the late eighteenth and early nineteenth centuries. The identification of trade partners was a distinctly secondary consideration, largely because that identification was hardly problematic. The demise of the Corn Laws (and the Imperial preference system which pre-supposed them) predictably led to increased British exports of manufactures to nearly all other nations because very few foreign firms could compete with Britain's technological advantage. Britain's agricultural imports arrived from a variety of sources as well since the opportunity costs of agricultural production were higher in Britain than anywhere else. By the middle of the nineteenth century, it was of small concern whether continental Europe or North America provided the bulk of these imports.
By contrast, political scientists and policy-makers, especially in the modern era, are less focused on the commodity composition of trade than on its partner composition and magnitudes. While they are cognizant of sectoral composition because domestic politics require an awareness of the distributional implications of trade, the prediction or explanation of this pattern is hardly theoretically problematic, except at the margins. The American case, the focus of this paper, is illustrative. Diminished trade barriers will surely shift American imports toward labor-intensive products (as predicted by both Heckscher-Ohlin and recent experience) and shift American exports toward products benefitting from technology, intellectual resources, and advanced service capacities. However, the partner composition of trade is much more central to contemporary policy controversies: the differential openness of various countries to U.S. exports (where American competitive advantage is assumed), the discriminatory effect of regional arrangements like the European Union, and the predatory export promotion practices of a small group of nations.
At the center of all these controversies are national policies in an era of increased management of trade. By 1980, it was estimated that 48% of global trade was "managed"—and by all accounts that figure has probably risen since (Spero, 1985: 122). Avowedly discriminatory arrangements, like the EU and NAFTA, explicitly encourage trade from some partners and discourage it with others. Yet, formal trade theory is largely silent on the causes and consequences of this changing policy environment. This limited ability to incorporate the actions of governments not only diminishes the role of trade theory in policy debates (beyond issuing a largely-ignored call for free trade), but also compromises the ability of orthodox trade theory to explain existing trade patterns. As Paul Krugman (1983: 343) has put it, "Most students of international trade have long had at least a sneaking suspicion that conventional models of comparative advantage do not give an adequate account of world trade." Indeed, beginning with the famous Leontief (1956) paradox and continuing through the more recent efforts of Leamer (1984), systematic empirical attempts to confirm the basic propositions of Heckscher-Ohlin trade theory have not fared well.
Recent efforts to fill this lacunae include alternative theories rooted in economic ideas like technological innovation, rent-seeking, economies of scale, intra-firm trade, demand biases and the like (Linder, 1961; Vernon, 1966; Krugman, 1979; Dixit, 1983; Krueger, 1974; Helpman, 1984; Yarbrough and Yarbrough, 1990). Strategic trade theory (Krugman and Smith, 1994), places the state at center stage, but only for a quite restricted range of trade opportunities. Few empirical studies have employed these ideas, none designed to suggest a general model of trade determination. Political considerations have been incorporated into models designed to explain patterns in trade barriers across sectors, but they have not been expanded to cross-national analyses (Magee et. al, 1989).
Our central question is simple: "What political, social, and economic factors explain the choice of trade partners by nations?". Our case is a time series of U.S. exports to 88 nations from 1970 to 1990.
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