Model Answer
0 min readIntroduction
International trade theory initially focused on comparative advantage, positing that nations should specialize in producing goods they can produce at a lower opportunity cost. However, this static view doesn’t fully explain the dynamic shifts in global trade patterns. The theory of acquired advantage, developed by economists like Paul Krugman and others, argues that countries can *create* advantages in specific industries through strategic government policies, investments in infrastructure, and technological innovation. This allows them to compete in sectors where they initially lacked a natural comparative advantage. The rise of East Asian economies, particularly South Korea and Taiwan, exemplifies this phenomenon.
Understanding Comparative and Acquired Advantage
Comparative Advantage, as articulated by David Ricardo, centers on relative production costs. A country specializes in producing goods it can produce relatively cheaper than other countries, even if it isn’t the most efficient producer overall. This is a natural advantage based on factors like climate, resources, and labor skills.
Acquired Advantage, conversely, suggests that advantages aren’t solely determined by inherent factors. Countries can actively shape their economic landscape to foster competitive industries. This involves deliberate interventions to overcome initial disadvantages.
Factors Contributing to Acquired Advantage
1. Government Policies
- Industrial Policy: Targeted support for specific industries through subsidies, tax breaks, and research grants. Japan’s Ministry of International Trade and Industry (MITI) in the post-WWII era is a classic example, fostering industries like steel, shipbuilding, and automobiles.
- Trade Policy: Strategic use of tariffs and non-tariff barriers to protect nascent industries while they develop competitiveness.
- Investment in Education and Skills: Developing a highly skilled workforce capable of innovation and adaptation.
2. Infrastructure Development
- Transportation Networks: Efficient ports, roads, and railways reduce transportation costs and facilitate trade. China’s massive infrastructure investments have been crucial to its export success.
- Communication Networks: Reliable and affordable communication infrastructure is essential for coordinating production and accessing global markets.
- Energy Supply: A stable and affordable energy supply is critical for industrial competitiveness.
3. Technological Innovation
- Research and Development (R&D): Investing in R&D creates new technologies and improves existing ones, boosting productivity and competitiveness. South Korea’s focus on R&D has transformed it into a global leader in electronics and semiconductors.
- Technology Transfer: Facilitating the adoption of foreign technologies through licensing agreements, foreign direct investment, and imitation.
- Intellectual Property Rights: Protecting intellectual property encourages innovation and attracts investment.
Examples of Acquired Advantage
| Country | Industry | Strategies Employed | Outcome |
|---|---|---|---|
| South Korea | Electronics & Shipbuilding | Government-led industrial policy, investment in education, technology transfer, export promotion. | Became a global leader in these industries, significantly increasing its share of world exports. |
| Taiwan | Semiconductors | Focus on specialized manufacturing, government support for R&D, attracting foreign investment. | Dominates the global semiconductor foundry market (TSMC). |
| China | Manufacturing (various) | Massive infrastructure investment, special economic zones, export-oriented policies, currency management. | Became the “world’s factory,” achieving substantial economic growth and global trade dominance. |
Limitations and Challenges
While acquired advantage can be effective, it’s not without challenges. Government intervention can lead to inefficiencies and rent-seeking behavior. Picking “winners” is difficult, and policies can be distorted by political considerations. Furthermore, global competition is constantly evolving, requiring continuous adaptation and innovation. The success of acquired advantage also depends on a stable macroeconomic environment and a favorable global trading system.
Conclusion
The theory of acquired advantage provides a more nuanced understanding of international trade than the traditional comparative advantage model. It highlights the role of proactive government policies, strategic investments, and technological innovation in shaping a nation’s competitive position. While not a guaranteed path to success, the experiences of countries like South Korea, Taiwan, and China demonstrate that acquired advantage can be a powerful engine for economic growth and development. However, careful policy design and continuous adaptation are crucial for sustaining these advantages in a dynamic global economy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.