The theory of international trade in capital goods

The central concern of this thesis is to identify and analyse the circumstances in which international trade in second-hand machines will take place, and to describe the consequences of such trade. It turns out that this topic is not so esoteric as it may initially seem, and part of the thesis is devoted to exploring alternative models of trade in capital goods, and to showing the extent to which all such models exhibit common features.
The method of approach is theoretical and largely mathematical, although some empirical data from secondary sources are presented.
A survey of discussions of the desirability of underdeveloped countries importing second-hand machines reveals considerable differences of opinion, and the absence of a consistent theoretical treatment. The larger part of Chapter 1 is taken up by a theoretical analysis of international trade in vintage models of capital formation. Within a unified framework of perfect competition and perfect foresight, a wide range of technical assumptions can be treated, and their economic consequences analysed. Fairly weak assumptions lead to the conclusion that the existence of factor price differentials will cause countries with lower wage rates to specialise exclusively in the use of old machines. The rather meagre empirical evidence available, of which a major part is evidence of intranational trade in Japan, is consistent with the hypothesis that factor prices differentials are the main force underlying this trade, although the evidence is by no means conclusive. It seems a reasonable conclusion that it is a pervasive feature of vintage models with factor price differentials that trade in secondhand machines takes place and that there is a tendency for particular countries to specialise in the use of particular vintages.
At this level of generality, however, not much more may be said. In order to investigate more deeply the implications of trade in vintage models, it is necessary to concentrate on more rigidly specified cases. Chapters 2 and 3 analyse steady states in the model in which the technical specifications of the only type of machine available are exogenously determined and there is labour-augmenting embodied technical progress: the 'clay-clay' model. With two countries growing at the same steady rate, the country with the lower yage rate and higher profit rate uses only second-hand machines. To analyse the effects of trade, we need to make some assumption about saving behaviour so that comparisons between steady states with free trade and steady states in autarchy may be made. In the literature on dynamic trade models, one of two assumptions is normally chosen: that (gross) saving rates are kept fixed, or that profit rates are fixed. In vintage models there is a third potential candidate, the net saving rate, but it is here shown that it is unsuitable, not providing a well-defined description of saving behaviour.
Chapter 2 adopts the fixed gross saying rate assumption and establishes that if the two countries have saving rates sufficiently far apart for factor price equalisation not to occur and if there is convergence to steady state, then trade will in the long run raise the consumption level in the high saving country which specialises in new machines, and raise the wage rate and lower the profit rate in the low saving country which specialises in old machines. It may allow full employment in the low saving country even if in autarchy it was unable to sustain full employment. Examples show that consumption in the low saving country may be lowered by trade, and the factor price ratio in the high saving country may move in either direction.
The alternative assumption that profit rates are fixed ('classical saving 1) is analysed in Chapter 3, where trade is shown to raise wage rates in both countries, and to affect consumption through a combination of three effects: (a) static gains from trade tend to raise consumption in both countries, (b) the country with the higher profit rate specialises in old machines so tending to raise its immediate consumption and reduce its long run consumption, while the other country does the opposite, if each country has an.efficient saving objective, (c) trade tends to reduce the consumption of the more inefficient country to the benefit of the one with the higher profit rate, if there is inefficient saving.
Chapter 4 analyses similarly the putty-clay model, in which there is the possibility of choice of technique. Remarkably, the fact that the low wage country now has the possibility of constructing machines more technically labour intensive than those in use elsewhere does not alter the pattern of trade: in this case also, the only machines it uses are second-hand machines imported from the high wage country.
A major point of interest in all three chapters is the effect labelled (b) above: the fact that trade in second-hand machines typically is associated with intertemporal substitution of consumption. This phenomenon has been noted in the literature on trade in the two-sector model, and Chapter 5 aims to show that it is a typical feature of models of trade in capital goods. The pattern of trade in the vintage models is shown to be analogous to the pattern in the two-sector model and in linear models. At first sight this aspect of trade may seem far removed from traditional trade theory, but in fact it is readily rationalised: countries with high profit rates and low saving rates are like impatient consumers, and trade allows them to reduce the capital intensity of their production and substitute consumption now for consumption later.
It emerges from some examples in Chapter 2 and from the analysis of Chapter 5 that the classical saving assumption that steady state saving programmes are characterised by fixed profit rates is in several respects more satisfactory and illuminating than the assumption of fixed saving rates.
There are many limitations to the methods used in the thesis: neither saving assumption is likely to be an accurate description of reality; the assumption throughout that both countries have the same steady growth rate is implausible; there are no transport costs; there is no real uncertainty; comparisons are made only between free trade and autarchy, with no discussion of tariffs; there is no discussion of the stability of steady states; the vintage models of Chapters 2 to 4 are all one-sector models; and producers are assumed to be perfectly competitive and perfectly prescient. But the most important limitation is the absence of the sort of empirical evidence that would permit one to reach detailed policy conclusions: evidence on the existence of significant externalities, on the input requirements of different machines (e.g. the skill requirements of maintenance), and on the hypothesis of ex-post absence of substitutability.
The thesis cannot therefore produce detailed practical recommendations, or blanket endorsement or condemnation of imports of used machines. Rather the aim is to clarify the nature of the issues involved and show what sort of considerations are relevant, to describe the pattern of trade that may usuallyj though not invariably , be expected to emerge, and to show that trade in models of capitalist production typically involves issues somewhat different from, though related to, the traditional concerns of trade theory.