What Goods Do Countries Produce and Trade? The Role of Technology-Endowment Matching
Xiaoping Chen and Hongsong Zhang
Xiaoping Chen and Hongsong Zhang
[Abstract] Technologies to produce different products are non-Hicks neutral, in the sense that they require different factor ratios in order to minimize production costs. The production cost of a product/industry, as a result, depends on how well the industry-level non-neutral technology matches with the country-level endowment. In this paper, we first document a set of stylized facts summarizing how the cross-country production specialization and bilateral trade at the industry level respond to this technology-endowment matching. We then embed the idea of endowment-technology matching explicitly in a general equilibrium model of international trade, and investigate its implications on international production, trade, and the welfare gains from trade. We find, both theoretically and empirically, that the matching between non-neutral technology and endowment is an important factor explaining the pattern of production and trade. It also generates new margins of welfare gains/loss from trade through the endogenous changes of factor price ratios and heterogeneous production adjustment across industries caused by the industry heterogeneity in non-Hicks neutral technology.