# **3. The Changing Structure of International Trade: From Comparative Advantage to Global Trade Networks**

The rise in trade in intermediate goods in manufacturing constitutes a fundamental shift in the structure of international trade and poses a challenge to classical economists’ understanding of how countries fit into the international division of labor. In the traditional theory of international trade, the direction of trade (i.e. which countries produce what goods for export) is determined by the principle of comparative advantage. According to this principle, countries will specialize in the production and export of the good or goods for which its relative productivity advantage exceeds that of the foreign country.<sup>16</sup> A radically different notion of comparative advantage emerges if we focus more generally on the changes in the structure of international trade over the last 20 years; in particular the rise in intermediate goods in overall international trade, whether it is done within firms as a result of FDI or through arm’s length subcontracting.<sup>17</sup> Such intermediate goods trade has risen more rapidly than trade in final goods, and it is the defining manifestation of globalized production, or what has variously been termed “outsourcing”; the “international disintegration of production” (Feenstra, 1998), “the slicing up of the value chain” (Krugman, 1995), “global production sharing” (Yeats, 2001), “the international integration of production” (UNCTAD, 1993), and the “rise of global production networks” (Ernst et al, 2002), or “global value chains” (Sturgeon, 2001).<sup>18</sup> In order to take advantage of globalization, and foster economic growth through international trade (Dollar & Kraay, 2001), it is essential for countries to have access to or be integrated in international production networks. In spite of the many opportunities offered by globalization, Sub-Saharan African countries, with the only exception of South Africa, do not figure prominently – if at all – in these global production networks. In order to get a better understanding of where exactly the opportunities for Africa lie, it is helpful to analyze country-level industry value chains and compare industry performance with their direct international competitors.

Through the multiple value chain studies that have been conducted on several sectors/ industries, we have identified five “critical factors” which determine the success of a country’s industry in reaping the benefits from global network trade: _price_ , _speed-to-market_ , _labor productivity_ , _flexibility_ , and _product quality_ .

> 16 See David Ricardo, _The Principles of Political Economy and Taxation_ , 1817 and the “Heckscher-Ohlin” Theory of International Trade, in most standard economics textbooks, for example in Appleyard and Field, _International Economics_ , Fourth Edition, Irwin McGraw, 2001

> 17 Robert Feenstra, “Integration of Trade and Disintegration of Production,” _Journal of Economic Perspectives_ , Fall 1998

> 18 William Milberg, “The Changing Structure of International Trade Linked to Global Production Systems: What Are the Policy Implications?” _ILO_ , Policy Integration Department, Working Paper No. 33, May 2004

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