PAPER TO BE PRESENTED AT THE 2005 AEA MEETINGS IN PHILADELPHIA:
ON THE 75th ANNIVERSARY OF THE OPPORTUNITY COST
FORMULATION OF COMPARATIVE ADVANTAGE
COMPARATIVE ADVANTAGE: FROM THEORY TO DATA
Daniel M. Bernhofen1
Department of Economics
Clark University, USA
John C. Brown
Department of Economics
Clark University, USA
December 24, 2004
1st draft (rough and incomplete)
Abstract
This essay shortly addresses the empirical challenges testing comparative advantage
trade models and then provides an integrated discussion of the recent empirical
implementation of the opportunity cost formulation of comparative advantage in light of
Japan’s 19th century opening up to international trade (Bernhofen and Brown, 2004 and
2005).
1. Introduction
During the last decade the gravity of research in the field of international trade has
shifted gradually from pure theory to empirical work guided by theory. Since the perennial
concept in international trade is comparative advantage, a considerable amount of research
effort has been devoted to investigate the empirical relevance of comparative advantage trade
models, with a particular emphasis on the factor proportion theory.
From the point of pure trade theory, the opportunity cost formulation is the most
general way to think about comparative advantage. Two features account for its popularity.
First, it provides an integrated framework in which the Heckscher-Ohlin and the Ricardian
models can be viewed as specific sub models of comparative advantage. Second, it allows for
a unified treatment of the pattern and the gains from international trade.
From an empirical standpoint, a shortcoming of the opportunity cost formulation of
comparative advantage is that opportunity costs are measured in terms of autarky prices. A
decade ago, Leamer and Levinsohn (1995) expressed this criticism rather forcefully:
1
Address for Correspondence: Daniel M. Bernhofen, Department of Economics, Clark University, Wo
rcester, MA 01610, USA. Phone: (508)-793-7185. Fax: (508)-793-8849. Email: dbernhofen@clarku.edu.
1
“When the Law of Comparative Advantage is expressed in terms of a comparison of
price vectors in autarky and trade, and when autarky prices are completely unobservable, we
must ask what this theory is all about”. (Leamer and Levisohn, 1995, p. 1342).
Whereas on the teaching front the opportunity cost formulation of comparative
advantage has retained its prominent position, the lack of empirical evidence for this theory
has diminished its status on the research front. The Zeitgeist dictates that theory is only
relevant if it can be linked to observables.
The purpose of this paper is twofold. First, it shows that the opportunity cost
formulation of comparative advantage is relevant empirically. Second, it demonstrates that
Haberler’s substitution/production posssibilities curve serves as an essential guide for the
empirical analysis. Although the formal empirical tests and estimates draw on trade theory in
higher dimensions, the basic insights can be pictured graphically in two dimensions.
This paper draws heavily from Bernhofen and Brown (2004, 2005) which have
established Japan’s 19th century move from autarky to free trade as a natural historical
experiment compatible with the key assumptions of neoclassical trade theory. One of the key
features of the natural experiment of Japan is the fact that high quality product-specific
autarky price data can be employed as a measures of opportunity cost. This allows for testing
the pattern prediction of the theory of comparative advantage (Bernhofen and Brown, 2004)
and estimating the aggregate gains from trade resulting from comparative advantage
(Bernhofen and Brown, 2005).
The paper is organized as follows. Section 2 provides a very brief overview of the
empirical comparative advantage literature. Section 3 uses Haberler’s substitution curve as a
guide for the empirical implemetation of the theory. Section 4 reviews the natural experiment
of Japan. Section 5 summarizes the empirical results and Section 6 concludes.
2. Empirical approaches to comparative advantage: a snapshot of the literature
In his seminal survey on the empirical implementation and testing of trade theories,
Deardorff (1984, p. 470-71) identifies the two key challenges for testing the theory of
comparative advantage:
“There are two reasons why tests of the theory of comparative advantage are difficult. The
first and most obvious is that relative autarky prices are not observable. Almost all countries
have engaged in trade throughout history, so there is no experience with autarky from which
to draw data. Even if there were, unless that experience were very recent, it would be highly
unlikely that the prices that prevailed then would be the same as those that would arise now if
trade were to be suspended. Yet it is only the latter that are relevant for determining the
current pattern of trade”.
The alleged unobservability of autarky prices has forced/lead trade economists to take
an intermediate step of linking the autarky price/opportunity cost formulation of comparative
advantage to observable features of an economy. Consequently, the empirical trade literature
has focused on specific sources of comparative advantage, which are associated with specific
models of comparative advantage: Ricardo, Ricardo-Viner and Heckscher-Ohlin.2
2
Our subsequent discussion will focus only on the empirical studies of the Ricardian and the Heckscher-Ohlin
model. For references on the Ricardo-Viner, or specific factor, model the interested reader should consult
Leamer and Levinsohn (1995, p.1345)
2
Given that David Ricardo developed the theory of comparative advantage in the
context of his labor theory of value,3 the name Ricardo has been associated with a one-factor
model where comparative advantage is defined in terms of country-specific differences in
fixed labor-output coefficients. The predictions of the Ricardian trade model motivated the
early empirical studies of comparative advantage by MacDougall (1951), Stern (1962) and
Balassa (1963). These papers provided evidence of a statistically significant positive
correlation between the relative labor productivities and the relative export performance of
the US relative to the UK. Although these studies have identified a robust empirical
regularity between relative labor productivities and trade flows, they do not provide hard
empirical evidence for the Ricardian comparative advantage model. The reason for this is
twofold.
First, from an empirical standpoint, labor productivity and trade are both endogenous.
The focus on a single factor of producton is misleading since country-specific differences in
labor productivities are the result of differences in the use of capital. The single factor
framework is too simple as a guide for empirical work. Second, the relationship between
labor productivity and trade is not unique to the Ricardian model. Ford (1967) and Falvey
(1981) have demonstrated that this relationship can also be derived in a Heckscher-Ohlin
framework.
Both criticisms point us to the empirically more fruitful framework for investigating
the sources of comparative advantage: differences in factor endowments in the spirit of Eli
Heckscher and Bertel Ohlin. In fact, the bulk of empirical work on comparative advantage
has been aimed at estimating the Heckscher-Ohlin-Vanek (HOV) model of international
trade.4
In order to isolate the effects of relative factor endowments on international trade, the
Heckscher-Ohlin-Vanek model imposes some strong assumptions with respect to other
potential sources of comparative advantage. In particular, it assumes that all countries have
access to the same production technologies and that consumers in all countries are
characterized by the same homothetic preferences. Given the rigidiy of these assumptions, it
is not surprising that there is little empirical support for a “pure version” of the HeckscherOhlin-Vanek model (e.g. Bowen, Leamer and Sveikaskus (1987)).
Initiated by the seminal work of Trefler (1993, 1995), the last decade has witnessed
substantial research efforts directed at explaining and remedying the “empirical failures” of
the pure version of the Heckscher-Ohlin-Vanek model. Consequently, the most fruitful
research initiatives have been aimed at expanding the factor endowments framework to
incorporate home biases in consumption, technological differences, intermediate goods and
the fact that countries produce different goods (i.e. multi-cone models).5 In summary, the
research has shown that relative factor abundance has a substantial effect on specialization
and the commodity composition on international trade as long as the other sources of
comparative advantage are accounted for.
3. The opportunity cost formulation of comparative advantage: a guide for empirical
work
While the empirical Heckscher-Ohlin literature addresses, for the most part, the factor
content of trade, the opportunity cost formulation of comparative advantage pertains to goods
rather than factors of production. In addition, the concept of comparative advantage pertains
3
See Stigler (1958) for an insightful discussion of how to interpret Ricardo’s labor theory of value.
Recent surveys of this literature are given by Leamer and Levinsohn (1995), Helpman (1998), Davis and
Weinstein (2003) and Harrigan (2003).
5
See Harrigan (2003) for an excellent survey of this literature
4
3
to both the pattern of international trade and the gains from international trade. In contrast to
the empirical Heckscher-Ohlin literature, which is silent with regard to how comparative
advantage contributes to the gains from international trade, the opportunity cost formulation
of comparative advantage provides an analytical framework for assessing the comparative
advantage gains from trade empirically. In what follows, we first discuss the comparative
advantage prediction of the pattern of international trade and then the comparative advantage
gains from international trade.
3.1 Predicting the pattern of international trade
The availability of autarky prices provided by the natural experiment of Japan
overcomes the first difficulty of testing the theory of comparative advantage. However,
Deardorff (1984, p. 471) identifies a second difficulty of testing comparative advantage also
if autarky prices are available: “..it would be highly unlikely that the prices that prevailed
then (i.e. in a state of autarky) would be the same as those that would arise now if trade were
to be suspended. Yet it is only the latter that are relevant for determining the current pattern
of trade”. Putting it differently, one needs to ask oneself how a static model can be mapped
into a dynamic world. Haberler’s transformation curve becomes now an essential tool for
addressing this point.
Figure 1 depicts Japan’s transformation curves, denoted by PPF1850s and PPF1870s,
during its autarky period (early 1850s) and its free trade period (early 1870s). PPF1870s lies
outside of PPF1850s , capturing the economy’s economic growth during this transition period.
This growth path is assumed to be independent of the country’s opening up. The economy’s
consumption/production point under autarky Ca1850s occurs at the tangency between the
autarky price line pa1850s and the economy’s autarky transformation curve PPF1850s.
International trade permits a separation between production and consumption. Under free
trade, the economy’s production point Pf1870s occurs where the free trade (or terms of trade)
price line pf1870s is tangent to the transformation curve PPF1870s. The free trade consumption
level is depicted by Cf1870s.
The theory of comparative advantage, in its static form, involves a comparison
between autarky and free trade under the same production possibility frontier PPF1870. As
depicted in Figure 1, the economy will have a comparative advantage and export good 1 if
the free trade relative price of good 1 (i.e. the slope of the line pf1870s) is larger than its
counterfactual relative price (i.e. the slope of the line pa1870s) that would have prevailed if the
economy had operated under autarky in the 1870s. Unfortunately, the latter price is not
observable. However, we can postulate a condition under which we can test the prediction of
the law of comparative advantage by substituting the observable autarky price pa1850s for the
counterfactual autarky price pa1870s. In fact, this identification condition does not require that,
as Deardorff thought, these prices need to be the same. It requires only that the slope of
pa1870s has not become larger than pa1850s. Under the assumption of unchanged preferences,
this condition can be interpreted that the economy’s growth path from PPF1850s to PPF1870s
was either balanced or biased towards its exportable.
4
Figure 1
good 2
Cf1870s
Ca1870s
pa1870
Ca1850s
pa1850s
Pf1870s
pf1870s
PPF1850s
PPF1870s
good 1
The discussion above pertains to the slope formulation of comparative advantage
familiar from undergraduate textbooks. In the two-good case, the slope formulation can be
expressed algebraically with a single inequality:
pa1T1+pa2T2>0,
(1)
where Ti denotes the net import volume of good i (i.e. if Ti>0(<0) good i is imported
(exported)) and pai denotes the autarky price of good i (i=1,2) .6
The general n-good formulation of the law of comparative advantage can then be
stated in terms of the Deardorff-Dixit-Norman (DDN) index of comparative advantage
(Deardorff (1980), Dixit and Norman (1980)):
n
∑ p T >0.
a
i i
(2)
i =1
As discussed in Deardorff (2005, symposium companion paper), (2) is a general correlation
version of the law of comparative advantage that can be applied to the data.
Applying the comparative advantage prediction in (2) to the case of Japan, and using
vector notation, we obtain an n-good version of the identification condition that we discussed
above:
(pa1850s- pa1870s )T1870s≤0,
(3)
which can be interpreted that the economy experiences a growth path which, on average, was
either balanced or biased towards these goods that the country exported under free trade.
6
Free trade prices do not appear in (1) since –under balanced trade- the ratio of the equilibrium trade volumes
equals the free trade price ratio. This is the familiar trade triangle relationship.
5
3.2. Estimating the gains from international trade
While the sign of the DDN index predicts the pattern of trade as suggested by the
theory of comparative advantage, the magnitude of the DDN index provides information
about the magnitude of the comparative advantage gains from trade. It particularly, it can be
shown (Bernhofen and Brown (2005)) that the DDN index is an upper bound for the Slutsky
compensation measure of a welfare change:
∆WSlutsky=Cf1850s pa1850s-Ca1850spa1850s≤ pa1850s T1850s.
(4)
The welfare gain from comparative advantage specialization is illustrated graphically in
Figure 2.7 Under autarky, the country faces the autarky price vector pa1850s and is able to
afford the autarky consumption point Ca1850s. The Slutsky compensation measure ∆WSlutsky
gives the increase in income that would be required to afford the counterfactual consumption
point Cf1850s. An empirical assesment of the gains from trade requires information on the
autarky price vector pa1850s and the counterfactual net import vector T1850. The key issue that
needs to be addressed is how to construct this counterfactual net import vector T1850. More
specifically, which goods would Japan have traded if it were open to international trade in the
1850s and in what quantities? The credibility of the construction of the counterfactual net
import vector T1850s will depend on the credibility of our assumptions about the pattern of
trade during the 1850s. As in the theoretical literature, the gains from trade are directly linked
to the pattern of trade.
The circumstances of Japan’s opening up provides an unsual opportunity for using the
observed net import vector T1870s as a basis for the construction of the counterfactual net
import vector T1850s. Since the opening up was a truly exogenous event, there is a strong case
for assuming that the country would have imported and exported the same commodities in the
1850s as it did in the 1870s and that this trade would have been also governed by the law of
comparative advantage.
7
See Bernhofen (2005) for a general discussion of how the comparative advantage gains from trade are linked
to real income analysis.
6
Figure 2
good 2
Cf1870s
Cf1850s
Ca1850s
∆W
Pf1870s
good 1
4. The natural experiment of Japan’s opening up to trade: preconditions and empirical
implementation
Implementing the opportunity cost formulation of the theory of comparative
advantage requires that an economy meets two key conditions.
•
•
First, domestic conditions must be the fundamental determinants of
opportunity costs.
Second, prices that guide both production and consumption decisions must
be close to competitive outcomes, so that the autarky vector of prices
effectively captures domestic opportunity costs.
Although the history of East Asia offers several candidate episodes of opening up from
periods of substantial restrictions on trade, the case of Japan comes closest to meeting three
additional conditions.
•
•
•
The natural experiment is of adequate strength to open up a gap between
autarky and international prices.
The counterfactual autarky price vector for the test of the law of comparative
advantage would have not been influenced by substantial changes in
opportunity costs brought about by changes in tastes or productivities absent
open trade.
The counterfactual net import vector required for estimating the gains from
trade can be estimated using information on the actual observed pattern of
trade about a decade after opening up.
4.1 Japan as a closed, competitive market economy ca. 1850
7
Consider first the case of Japan It may be safely asserted that most nations (or regions,
for periods prior to the nation-state) have engaged in international trade for most of economic
history, although there is debate among economic historians when the volume of trade was
sufficient enough to generate significant impacts on the economies engaged in trade. For
most, the process of integration into inter-regional or international trading networks was a
gradual process, driven by declines in transport costs, discoveries of new goods, and the
development of effective market infrastructures.8 We do know that by 1500, most economies
of western and central Europe were engaged in a complex network of intra-regional trade
with links to east Asia. Likewise, the countries and east and south Asia traded extensively via
networks focused on China, which was then the leading industrial and commercial power of
the east (and perhaps, the globe). The opening of seaborne trade routes between east Asia and
western Europe and Latin America (via Manila) created ushered in a period of direct
commercial penetration into south and east Asia by merchants of several European countries,
including Holland, Portugal, and England. With commercial penetration came limited
territorial incursions and the importation of potentially threatening ideologies, including
Christianity.
China, Korea, Thailand and Japan reacted to these developments during the 17th and
18 centuries. All four countries enacted policies designed to reassert control over trade and
create a buffer between western merchants and domestic markets. These efforts varied in
degree, but all attempted to severely restrict imports from western countries and place limits
on the goods to be exported. They prohibited the import (or particularly export) of certain
goods, including silver; they sponsored trade monopolies; and they restricted trade activity to
one or a few ports. The treaties signed with Great Britain in 1842 after the Opium Wars
included modest tariffs, a removal on prohibitions on the import of opium, and the
establishment of several treaty ports where westerners were allowed to live and enjoyed
rights of extra-territoriality. Although the treaty marked a severe intrusion in China’s
sovereignty and introduced a liberal trading system, it only expanded a trading relationship
that had extended back to 1757, when China opened up trade through the port of Canton. In
addition, Canton had long stood at the center of a trading network that included most nations
of southern and east Asia. the trade in this system most likely dwarfed the volume of any
likely trade with the west.
th
Korea offers a similar case. Japan forced a treaty on Korea in 1876 that opened it up
to trade with Japan and western nations, but it had already long been involved in cross-border
trade with China in both tributes to the emperor and in commercial trade (McNamara, 1996).
Finally, Thailand’s agreed by treaty to open up its markets to western goods and
abandon royal monopolies on trade and prohibitions on some imports and exports in 1855.
This change in policy actually marked the culmination of a gradual process of opening up.
Already by the 18th century, Thailand was involved in an extensive trade of rice and pepper
with China and other southeastern Asian countries (Ingram, 1971, pp. 21-26). It partially
opened up its ports further to Great Britain in 1820(Syamananda, 1988, pp. 115-116).
Two features mark Japan’s episode of restrictions, which lasted from 1639 through
1859: it lasted longer and it became increasingly stringent. Unlike other East Asian countries,
the Japanese Shogunate restricted the trade of both the Chinese and the Europeans. Japanese
8
See O’Rourke and Williamson (1999) argue that transport costs fell enough to integrate European and
American markets for grain and other products by 1900. Persson (2004) argues that reductions in price
differentials were much smaller, driven perhaps as much by elastic supply responses in the New World.
8
policy after 1639 permitted trade with the Dutch and Chinese only in Nagasaki. Both groups
were physically confined to enclaves of a few small city blocks in Nagasaki. Along with
imposing restrictions on what could be imported or exported (primarily silver and then
copper), the officials of the Shogunate negotiated prices with traders and then resold the
goods (at a substantial profit) on the domestic Japanese market. Nonetheless, Japan still
served as an important source for silver and copper during the 17th century. By the early
1700s, restrictions on the export of precious metals reduced the number of Dutch ships a year
that were allowed to dock at the trading enclave at Nagasaki to two. By 1800, the onceflourishing trade with the Chinese had suffered a similar fate. By the mid-1840s, about 3.5
junks per year continued to trade; the volume was about the same as trade with the Dutch.9
Tashiro (2004), documents a similar pattern of continued trade through mid-18th century
through the other two points of contact between Japan and the rest of the world, Tsushima
(Korea) and Satsuma (Ryukyu Islands). Restrictions and then an outright ban on the export of
silver brought this trade to a halt as well. By the late autarky period, the import trade was an
estimated 0.3 to 0.5 cents per capita, or one-tenth of American trade during the enforced
restricted trade of the Embargo Period of 1808-1809. Japanese historians note that the two
most important imports of the early autarky period, sugar and silk, were both subject to
successful import substitution.
Aside from the modest imports of sugar, the Japanese economy ca. 1850 was
essentially a “closed system”(Shimbo and Hasegawa, 2004, p. 168). Recent research into the
Japanese economy during the period of autarky confirms that by and large it was also
competitive market economy. With the exception of capital intensive sake and soya sauce
breweries, most production was in the hands of small family-based productive units that more
often than not were located in rural areas. A market economy became established during the
17th and 18th centuries. The development of rural industry and earlier efforts of the Shogun to
control the economy at the pivot points of markets in Edo(Tokyo) and Osaka gave way to a
multi-nodal system of subregional trading centers (Miyamoto, 2004). The emergence of
regional specialization in a number of rural-based industries, most notably cotton textiles and
silk, and evidence from the behavior of rice prices points to an integrated national economy.
Price differentials between Osaka and Edo for many other commodities were also close to
transport costs (Shimbo and Saito, 2004, p. 362). Finally, it should be noted that invoking
opportunity costs as a condition for comparative advantage relies upon full employment of
resources. Research carried out by Nishikawa (1978) and Saito has confirmed that the
marginal product of labor in rural handicraft industry was equivalent to the marginal product
of labor in the production of the staple grain, rice. The Japanese economy of the autarky
period did not know large-scale rural underemployment.
4.2 The episode of the opening up as a robust natural experiment
In Bernhofen and Brown (2005), we document in more detail the ways in which the
opening up of Japan to international trade can be construed as an “unnatural” natural
experiment in the sense of Rosenzweig and Wolpin (2000). Four features of the case of Japan
make it particularly compelling natural experiment. Most important, the abrupt switch from a
closed to open economy was out of the hands domestic decision-makers. Consistent with the
experience of other East Asian economies, Japan eventually was required through the implicit
9
The main import good ca. 1833 was sugar, of which about 300 metric tons would have been imported annually
(or about 4.5 percent of consumption).. That compares with imports of about 1,800 metric tons in 1865 and
18,000 metric tons in 1868.
9
(and sometimes explicit) use of superior force by the United States and other western powers
to abandon its policy of a closed economy for good on July 4, 1859. The terms of the opening
up were subject to negotiation, but in all practicality left few protections between Japanese
markets and international prices. The rearguard efforts of the Shogun and local lords to
restrict exports of silk and to continue to regulate consumption of western goods with
sumptuary laws were unsuccessful.10
Second, developments within the Japanese economy and in the world economy over
the years when the Japanese economy became closed created substantial differences in
opportunity costs across a wide range of products. Japan’s unusual geographic diversity
permitted it to produce a wide range of goods under autarky, all of which could potentially
compete with imports. Sugar production in the south had substituted for imports from China
and Indonesia; the development of domestic skills enabled the expansion of sericulture to
replace imports from China. A cotton textile industry relying upon domestically-produced
cotton replaced the traditional production of linen cloth using yarn made from hemp. In other
areas, domestic products offered ready substitutes. Japan produced virtually no livestock
(except for horses and some draft animals). The scarcity of leather led to the production of
heavy paper substitutes for gloves and coats. Padded cotton clothing served the purpose of
woolens. The absence of domestic glass production led to a reliance on paper for window
coverings. At the same time, productivity advances associated with the industrial revolution
outside of Japan—particularly in the production of cotton goods—had significant impacts on
the prices of potential imports. The most spectacular example—development of machinepowered spinning of cotton yarn over the last third of the 18th century— resulted in a fifteenfold productivity improvement (Harley, 1998).
The third important feature of the Japanese natural experiment was that the exposure
to international prices prompted a consequential change in the structure of Japanese prices, or
in terms of Figure 1, the change from the slope of pa to pf was dramatic. The realignment of
Japanese relative prices in response to the opening up is known by Japanese economic
historians as the price revolution (Miyamoto, 2004). The “unequal” trade treaties resulted in a
tariff structure that by the mid-1860s amounted to two to five percent ad valorem. Modest
export taxes amounting to a few percent ad valorem were permitted the government of the
Shogunate to provide limited revenue. Despite poorly developed transportation networks, the
other potential source of protection, high transport costs, was not sufficient to protect
Japanese markets from products of the industrial revolution such as machine-made cotton
yarn or woolens. Scherzer (1872, pages 392 and 399) offers evidence that the transport cost
wedge between Manchester for cotton yarn or Leeds for woolen cloth and the Japanese port
of Yokohama was only 13 to 15 percent just a decade after opening up.
Finally, Japan’s re-integration into the world economy after 1859 took place solely
through trade. In the west, countries such as Italy and Sweden experienced substantial outmigration in response to the American invasion of European grain markets in the 1870s and
1880s. Receiving countries for immigrants such as the United States and Argentina were also
the destination of massive capital imports. Japanese emigration was never consequential, and
it took place well after the first decade of opening up. Currency instability and insecure
government finances precluded foreign lending; direct investment was limited to the
construction of a few facilities for drying green tea for export. The end result of all four of
these influences is captured in Table 1, which documents the fact that the case of Japan offers
the most dramatic expansion of trade among all of the transitions in East Asian economies. In
all three economies, the volume of trade grew after opening up. In Japan was the expansion
10
See Mathias-Pauer and Pauer (1992) and Tamura(2001).
10
so dramatic that by the early 1870s, the volume of trade per capita was almost equivalent to
Thailand.
4.3 Data and estimates generated for counterfactuals
Expressions (2) and (4) identify the data needed to test the opportunity cost
formulation of the law of comparative advantage and to evaluate the welfare gains from
trade. At the heart of both expressions is the DDN index, the inner product of a vector of
autarky prices and net exports. Testing the law of comparative advantage requires estimation
of a counterfactual vector of autarky prices for an historical period when Japan was actually
experiencing open trade. Evaluating the gains to welfare that result from comparative
advantage requires estimation of a counterfactual vector of trade for an historical period when
the economy was actually in autarky. As section 3 demonstrates, estimates of the
counterfactual price vector and the counterfactual trade vector can use actual historical data
(prices during autarky and trade during open trade) if the actual historical record suggest that
reasonable limiting conditions are met.
Empirical analysis first identified the time periods for the autarky and free trade
periods. The historical period chosen for autarky (1851 to 1853) ends just before the signing
of the first treaty between a western power and Japan in 1854. Already by 1855, there are
numerous reports of western visits to Japan and trade began in the second half of 1859. The
period chosen for open trade was 1868 through 1875. Reports of western observers suggest
that only after interventions such as the shelling of Shimenoseki in 1864 did the rearguard
efforts to restrict trade end. The reliable and detailed data on trade volumes reported on a
consistent basis for all of Japan are first available in 1868, about two years after historians
conclude that an open trade regime had been established. In addition, even a new static
equilibrium requires a time for adjustment. In the case of Japan, that period would have been
the three to four years required to bring mulberry trees (for feeding silkworms) and tea
bushes into production in response to changes in relative prices.
The efforts of Japanese historians to transcribe and publish the contents of merchant
account books and the contemporary accounts of foreign visitors provide a wealth of data on
prices in the autarky period. The main source of prices are from market data from Osaka, but
the account books of the large merchant firm in Mitsui also provides data from Edo (Tokyo)
and Kyoto. All told, price data was identified for virtually all of Japanese exports and for
about two-thirds of imports. An index of import prices was used to convert the average value
of the remaining imports into autarky equivalent prices.11
Equation (3) provides the identifying conditions that must be met in order to use
actual autarky price data from 1851-1853 to approximate autarky prices in a counterfactual
state of autarky in 1868-1875. The condition is essentially that growth from 1853 to 1868
would have been balanced or biased towards Japan’s eventual main exports, which were silk
and tea. This conjecture is reasonable in light of the historic evidence. Productivity growth in
the production of silk, which dominated Japanese exports for several decades after opening
up, would have continued as the economy substituted domestic production for imports from
China and the Japanese silk producers continued to learn techniques of sericulture. At the
same time, it appears that the expansion of production of major imports such as sugar and
11
Details on sources are provided in Bernhofen and Brown (2005). The pricing of woolens, which were not
produced in Japan under autarky, poses special challenges for counterfactual analysis. In the test of comparative
advantage, the price was set at a minimum that reflected the opportunity cost of production in England, the
major exporter at that time. In the case of estimating the welfare gains to trade, the price was set at the virtual
price, which can be gleaned from price information available on the miniscule imports of woolens during the
closed period.
11
cotton goods faced constraints on productivity improvements. The production of sugar was
limited by the scarcity of land with suitable climate conditions. Cotton spinning and weaving
remained wedded to the hand technologies that had been in use for centuries.12
Organizational innovations associated with proto-industrialization of cotton production had
realized most potential productivity gains by the 1840s. The gap between Japanese technical
skills and western technologies also posed an important barrier; even with the availability of
international trade, adaptation and adoption of western technologies promising significant
improvements in productivity required several decades (Pauer, 1987).
The evaluation of welfare gains using equation (4) requires estimation of the
counterfactual vector of net exports for the autarky period (1851-1853) had the Japanese
economy been open to international trade. Table 2 details the main features of the
composition of international trade from 1868-1875 with a comparison with exports for 1860,
the first full year of trade. Unfortunately, detail on imports is not available. The pattern of
exports in the first year is roughly similar to the pattern after nine years. Products of
sericulture accounted for the bulk of exports in both periods. The shift to silkworm eggs
represents unusual opportunities created by the spread of pebrine silkworm disease in Europe.
Tea production eventually increased (reflecting the time lag required before bringing new
bushes into production). Such detail is not available for imports for both main ports
(Nagasaki and Yokohama). Nonetheless, it is apparent that the most important imports in the
early 1860s were cotton and woolen textiles, which was also the case in 1868 to 1875. The
counterfactual estimate of net imports also required adjusting for the potential growth in the
Japanese economy from the early 1850s to the late 1860s (see Figure 2). The calculations
presented below assumed a conservative growth rate of GDP per capita of 0.4%, which is rate
suggested by authors such as Nishikawa (1987, p. 323).
Finally, the calculation of welfare gains required estimates of GDP per capita for the
autarky period to place the size of the estimated inner product in an appropriate context.
Estimates are available for the GDP per capita of Japan in the early 1880s and for the GDP
per capita of the domain of Choshu from detailed surveys conducted in the early 1840s.
Bernhofen and Brown (2005) detail the procedures used to convert these data into estimates
for the early 1850s. The backcasting approach follows the procedure of Maddison (2000) in
his survey worldwide economic development and estimates GDP per capita under a
reasonable range of assumptions of economic growth. The forecasting approach uses a
similar procedure after adjusting the estimates for the early 1840s for a composition of the
labor force that is closer to Japan as a whole.
5. The results of the natural experiment
1. Table 1 provides the estimates of the inner product for seven years of the natural
experiment. During each test year, the value of the inner product is negative. The
hypothesis implied by the theory of comparative advantage is not rejected
2. Table 2 provides the estimates of the upper bound to the gains from trade. They range
from 5.4 to 9 percent.
12
It is striking that in the presence of trade (and substantial import competition), the one innovation that could
have offered ready ready improvements in weaving productivity in cotton textiles, the flying shuttle, was
introduced only fifteen years after trade opened up.
12
Table 1: Three Cases of Opening Up in East Asia
Country
Year of
“Opening Up”
Imports per Capita in Mexican Cents
Before Opening Up
After Opening Up
(Year)
(Year)
Japan
1859
0.5 (1847)
79 (1872)
China
1842
9.4 (1830s)
26 (1870)
Thailand
1855
48 (1855)
85 (1870)
Source: Von Scherzer (1872, p.256), Sugiyama (1998, p.46) and Ingram (1971, pp.7, 332,
333.)
13
Table 2: The Composition of Japanese Trade, 1868-1875 compared with 1860
1868-1875
Product
Percent of Imports
1860
Percent of Exports
Percent of Exports
Agricultural: Non-Food
Silk
35.9
Silkworm Eggs
15.7
Other (Vegetable Wax and Cotton)
2.2
71.38
2.7
0.46
28.2
6.90
8.2
4.80
Agricultural: Food
Tea
Rice
10.8
Sugar
9.9
Other Foods
4.2
Other Raw Materials
Fuel (Coal and Charcoal)
Other
1.9
3.1
Textiles
2.9
9.50
0.2
Cotton Yarn
15.1
Cotton Cloth
18.4
Woolens
19.2
Other textiles
1.8
Other manufactures
4.3
Weapons and ammunition
2.7
Machinery and instruments
1.4
Miscellaneous manufactures
11.2
Miscellaneous
1.13
5.20
Notes: The trade shares of each commodity group are based upon total imports and exports
for the period 1868-1875.
Source: Japan Bureau of Revenue (1893) and Consular Reports for Nagasaki and Yokohama
in 1860.
14
Table 3: Estimates of the inner product in various test years (in million ryo)
Components
(1) Imports with
observed autarky
prices
(2) Imports of
woolen goods
(3) Imports with
approximated
autarky prices
(Shinbo index)
(4) Exports with
observed autarky
prices
(5) Exports with
approximated
autarky prices
(Shinbo index)
Total inner
product (sum of
((1)-(5))
1868
1869
Year of Net Export Vector
1870
1871
1872
1873
1874
1875
-2.24
-4.12
-8.44
-7.00
-5.75
-5.88
-7.15
-7.98
-0.98
-0.82
-1.29
-1.56
-2.16
-2.50
-1.56
-2.33
-1.10
-0.95
-0.70
-0.85
-1.51
-2.08
-1.60
-2.65
4.07
3.40
4.04
5.16
4.99
4.08
5.08
4.80
0.09
0.03
0.07
0.07
0.15
0.07
0.11
0.10
-0.18
-2.47
-6.31
-4.17
-4.28
-6.31
-5.11
-8.06
Table 4: Estimates of the Comparative Advantage Gains from Trade for the Japanese
Economy: 1851-1853 (As a percent of GDP)
Method and Period
Using the “backcast”
estimates of GDP
Using the “forecast”
estimates of GDP
Assumed annual growth rate of GDP per capita
0.15%
0.4%
1.5%
2.0%
5.4
5.8
7.8
9.0
9.1
8.9
7.8
7.3
Sources for Tables 1 and 2: Bernhofen and Brown (2004, 2005)
15
6. Concluding Remarks
…
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16
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17