Which theory of Trade says that two countries can trade only if the countries are on same economic footing?

Making trade work for all implies that we also address concerns around the world that competition in the global economy is not ‘fair’, that it is distorted by market barriers and government actions that favour companies and products that are not necessarily the best. A level playing field in global trade means that all countries and firms compete on an equal footing to offer consumers everywhere the widest possible choice and the best value for money.

The rules-based multilateral trading system embodied in the World Trade Organization (WTO) has underpinned the growth in global trade, allowing more economies and people to benefit from equal access to global markets. Critically, WTO rules helped to prevent countries from slipping into a 1930s-style trade war that would have greatly exacerbated the 2008-9 global economic crisis. Yet gaps in the rulebook and unfinished business continue to undermine progress towards a more free, fair, and open trading system. And unless more is done to level the playing field, unfair trade practices risk endangering these major achievements.

Many subsidies and other forms of support are used by governments to favour firms – state-owned or otherwise – that they want to keep in business or see succeed in international markets. Where that support enables unprofitable companies to crowd out others that are better performing, then this casts doubts on the fairness of global trade.

Where fairness is questioned, the sustainability of open global trade and investment is at risk. Whether it is rules that ensure that private and state-owned firms compete on the same terms, or that countries are not able to subsidise their own firms or farms at the expense of others, governments have an important role to play in negotiating disciplines that level the playing field in global trade and investment. Much more also needs to be done to ensure that everyone, from companies to countries, plays by the agreed rules.

How is the OECD supporting a more level playing field?

The OECD work in this area aims to support a more free fair and open international trading system by helping governments to understand the extent and implications of government support. We have a long history and experience in measuring government support measures and related trade distortions across a large range of sectors and countries, including in areas such as: government support for agriculture, fisheries, and fossil fuels; policies that restrict exports of key raw materials, such as the rare earths, lithium, and cobalt that feed into smart phones, wind turbines, and electric vehicles; and policies that stand in the way of services trade between countries. More recently, the OECD has begun to expand the measurement of trade distortions and government support to new industrial sectors, starting with the aluminium value chain and the semiconductor value chain.

The most recent work on level playing field examines support that is provided by governments through the financial system, either in the form of below‑market borrowings or below-market equity. To better understand the nature and scale of this support, the report on below market finance uses publicly available information for 306 of the largest manufacturing firms in 13 industrial sectors.

What Is the Heckscher-Ohlin Model?

The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources.

The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.

Warning

Here is some important information regarding the Heckscher-Ohlin model.

• The Heckscher-Ohlin model evaluates the equilibrium of trade between two countries that have varying specialties and natural resources.
• The model explains how a nation should operate and trade when resources are imbalanced throughout the world.
• The model isn't limited to commodities, but also incorporates other production factors such as labor.

The Basics of the Heckscher-Ohlin Model

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. Economist Paul Samuelson expanded the original model through articles written in 1949 and 1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.

The model isn't limited to tradable commodities. It also incorporates other production factors such as labor. The costs of labor vary from one nation to another, so countries with cheap labor forces should focus primarily on producing labor-intensive goods, according to the model.

Evidence Supporting the Heckscher-Ohlin Model

Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets.

The Linder hypothesis outlines and explains this theory. It states that countries with similar incomes require similarly valued products and that this leads them to trade with each other.

Real-World Example of the Heckscher-Ohlin Model

Certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other countries can easily access and store precious metals, but they have little in the way of agriculture.

For example, the Netherlands exported almost $577 million in U.S. dollars in 2019, compared to imports that year of approximately $515 million. Its top import-export partner was Germany. Importing on a close to equal basis allowed it to more efficiently and economically manufacture and provide its exports.

The model emphasizes the benefits of international trade and the global benefits to everyone when each country puts the most effort into exporting resources that are domestically naturally abundant. All countries benefit when they import the resources they naturally lack. Because a nation does not have to rely solely on internal markets, it can take advantage of elastic demand. The cost of labor increases and marginal productivity declines as more countries and emerging markets develop. Trading internationally allows countries to adjust to capital-intensive goods production, which would not be possible if each country only sold goods internally.

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