A Theory of Comparative Advantage with Specialized Subnational Regions

• DOI: http://doi.org/10.1111/roie.12274
• Date: 01 August 2017
• Author: Siu‐kee Wong,Baomin Dong
• Published date: 01 August 2017

A Theory of Comparative Advantage

with Specialized Subnational Regions

Baomin Dong and Siu-kee Wong*

Abstract

This paper investigates the effects of subnational regionalization on a country’s terms of trade, trade pat-

terns and its welfare. We show that a country can gain from dividing itself into two regions with different

factor ratios (and preclude the cross-region factor mobility). Allowing a region in a country to have a com-

parative advantage different from the country as a whole can generate a welfare-improving terms-of-trade

effect, which is reminiscent of immiserizing growth in reverse. Our simple model can provide a justification

for “self-sufficiency” programs or “special industry zone” policies in some developing countries. We also

show that subnational regionalization can reduce the volume of trade and or even reverse countries’ trade

patterns. This finding could provide an alternative explanation for the missing trade problem and the para-

dox between trade patterns predicted by the standard Heckscher–Ohlin comparative advantage model and

those found empirically.

1. Introduction

Economists recently have become interested in the consequences of frictions in the

trade of factors and goods within a country. These frictions can be attributed to either

government regulations or geographical barriers. In many developing countries, spe-

cial economic zones are set up to help develop capital-intensive industries. The supply

conditions of production factors in these regions are typically very different from those

in the rest of the country. For example, supplies of capital can be constrained by the

budget of the local government. Labor movement can also be partially impeded by

regulations such as the residential registration system in China. Even in developed

countries, uneven supplies of amenities and land-use regulation lead to regional differ-

ences in factor prices. The lack of free factor mobility within a country contrasts glar-

ingly with the standard assumption in trade theory. Regional segmentation caused by

industrial agglomeration is well studied in economic geography. Sophisticated indus-

tries tend to concentrate in certain regions and the literature in this area is volumi-

nous. For example, in his influential book, Krugman (1991) studies regional

specialization and argues that local concentration of production is an issue as impor-

tant as international trade. Using the “manufacturing belt” in the USA as an example,

Krugman (1991) attributes the regional agglomeration of economic activities to econo-

mies of scale and imperfect competition. By contrast, studies in classical trade theory

along these lines are scarce. Wilson (1990) finds that local governments’ uneven

* Dong: School of Economics, Henan University, Kaifeng, China, 475000. Tel: 186-371-23881606. Fax:

186-371-23881609. E-mail: baomindong@vip.163.com. Wong: Division of Business and Management,

United International College, 28 Jinfeng Road, Zhuhai, Guangdong, China, 519085. The financial sup-

port of the MOE Project of Key Research Institute of Humanities and Social Sciences at Universities

(14JJD790012) “An Analysis on the Evolution of Yellow River Civilization in Terms of the Public

Economy” is appreciated. The authors are grateful to an anonymous referee and the editor whose com-

ments greatly improved the exposition of the paper. All remaining errors are those of the authors.

V

C2016 John Wiley & Sons Ltd

Review of International Economics, 25(3), 567–577, 2017

DOI:10.1111/roie.12274