ASSIGNMENT: INTERNATIONAL TRADE
Critically discuss the relevance of the Heckscher Ohlin Samuelson (HOS) model in explaining
at least three different levels of trade flows experienced in South Africa.
The Heckscher Ohlin Samuelson is a two by two-by-two trade model, consisting of two goods,
two countries and two factors of production: labor and capital. In this model a country exports a
commodity which intensively uses its abundant factor, and imports those which uses the country
scarce factor intensively, (Alleyne & Sabramanian, 2001). The key assumptions of the model are
constant returns to scale, identical technologies and preferences between countries, different
endowments in relation to factors of production, fixed supply of factors of production which are
immobile between countries and the factors are fully employed (Alleyne & Sabramanian, 2001).
This model explains why developed countries and developing countries have different trade
patterns. Most developed countries are capital-intensive because of their high ratio of capital to
labor while developing countries are labor-intensive, (Mutambara, 2010). Therefore, each
country will have a comparative advantage in producing a good of its high intensity which will
grow the sectors in those respective factors. The trade pattern between South Africa and Brazil
investigated from 2001 to 2008 shows that South Africa’s main imports from Brazil are
manufactures of high technology because Brazil has more complex industry than does South
Africa, (Mutambara, 2010). Therefore, the Heckscher Ohlin model is very relevant as empirical
investigation confirms.
There are different levels of trade flows, of which this discussion will focus on product level,
firm level and country level for South Africa and then discuss the evidence from other countries.
South Africa produces many goods that it trades with other countries and trade has assisted in
growth and expansion of firms and different sectors of the economy.
The study by (Alleyne & Sabramanian, 2001) has shown that South Africa is a net importer of
capital and labor services and net importer of skilled and unskilled labor services when analyzing
the factor content of South Africa trade specifically the manufacturing industry. The results from
the study revealed that South Africa is relatively capital intensive when trading it with high
income countries. By being a net exporter of capital goods could be explained by the growing
manufacturing sector of the country.
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In empirically investigating the hecksher-ohlin model, the model has been criticized for its
assumptions of zero transport cost as well as immobility of factors between countries, (Fourie,
2009). Fourie (2009) used the Hecksher-Ohlin model to explain the pattern of trade for travel
services in Africa and has noted that African countries have a comparative advantage in natural
resources and labor therefore they export services that are labor and natural-intensive. The
growth of the tourism sector in Africa has been attributed to African countries being able to
export services they are factor intensive in, and the hecksher-ohlin model in the paper had
however been modified to include transport costs. South Africa is one of Africa’s top four
tourism destinations, (Fourie, 2009).
An example of Heckscher-Ohlin is that countries like Japan and United States are capitalintensive and hence export automobiles and planes while China, India and Taiwan which are
labor intensive do export fabrics and shoes, (Muntean, 2005). The model of Heckscher Ohlin
also proves that as trade between countries takes place, the relative prices of goods in the two
countries will converge, and owners of goods whose production is in abundance, prices increase
benefits them, (Muntean, 2005).
In investigating how differences in manufacturing export performance is explained by the skills
intensity between Africa and Asia, micro and macro data were used to analyze firm-level
determinants of export performance. It was found that poor performance of African countries is
linked to low ratio of skills to land, hence why Africa exports primary materials only unlike
other nations which are advanced, (Zeufack, 2001).
The effects of trade on exports, on determining wages of individuals can be explained by the
behavior of exporting firms. Melitz model has shown that highly productive and efficient firms
self-select into the exporting market, (Melitz, 2003). The model has further shown reallocation
that happens within industry as less efficient firms exit the market, thus trade liberalization
influences growth and welfare of consumers.
Skilled and educated persons benefit (in terms of wages) when their firms are exporters more
than the unskilled labor, hence the Heckscher Ohlin model perfectly explains the wage
differentials for labor abundant economies, (Milner & Tandrayen, 2006). In Latin America,
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empirical studies have shown that higher exports positively impact wages and increases the wage
gap between the skilled and unskilled labor force.
At firm level, the investigation on ‘impact of exporting and export destination on manufacturing
wages- evidence for Sub Saharan Africa’ by (Milner & Tandrayen, 2006) revealed that skilled
workers wages were excess while unskilled workers earned less. Those on white collar jobs
would earn up to 29% more than the unskilled workers. This shows that there is wage differential
for the skilled and unskilled labor market and the skilled laborers benefit more from export status
of the firm than unskilled.
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Bibliography
Alleyne, T., & Sabramanian, A. (2001). What does South Africa's Pattern Say About It's Labor
Market. International Monetary Fund Working Paper WP/01/148, 1-25.
Fourie, J. (2009). Evaluating Africa's comparative advantage in travel service exports.
Stellenbosch Working Papers 06/2009, 1-16.
Mamoon, D. (2017). Why International Trade Cause Inequality in Developing Countries.
Retrieved 4 29, 2021, from https://mpra.ub.uni-muenchen.de/82268
Melitz, M. J. (2003). The Impact of Trade on Intra‐industry Reallocations and Aggregate
Industry Productivity. Econometrica 71, no. 6: , 1695–1725.
Milner, C., & Tandrayen, V. (2006). The Impact of Exporting and Export Destination on
Manufacturing Wages: Evidence for Sub‐Saharan Africa. Review of Development
Economics, 13-30.
MUNTEAN, M.-C. (2005). Analysis Of The Hecksher-Ohlin Model. Annals of Dunarea de Jos
University. Fascicle I : Economics and Applied Informatics, 1-6.
Mutambara, T. E. (2010). Examining South-South Trade Flows And Market Access Conditions:
A Case Study Of The India, Brazil And South Africa Development Initiative. Trade and
Industrial Policy Strategies, 1-54.
Smet, K. (2013). Modelling the Regional Heterogeneity of South Africa's Trade. South African
Journal of Economics, 81(4), 517-537. Retrieved 4 29, 2021, from
https://ideas.repec.org/a/bla/sajeco/v81y2013i4p517-537.html
Zeufack, A. (2001). Export Performance in Africa and Asia's Manufacturing: Evidence from
Firm‐level Data. Journal of African Economies, 10(3), 258-281. Retrieved 4 29, 2021,
from https://ideas.repec.org/a/oup/jafrec/v10y2001i3p258-281..html
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