Introduction
Global trade dynamics follow consistent patterns where some countries dominate others due to comparative advantages over their market partners. It is also the making of oligopolies in specific commodity markets while others remain top consumers. Whereas countries would want an absolute advantage over their competitors, global trade dynamics and competitions are so stiff that some can only afford comparative advantage, the productive or cost efficiency advantage compared to other nations with similar commodities. When a country remains competitive in any trading market, the most salient model to apply to explain such trading patterns is the Heckscher-Ohlin (H-O) factor-price model, the simple equilibrium model for comparing production factors across competing nations. This paper analyzes the differences in comparative advantages between developed and developing countries with a specific interest in the Kingdom of Saudi Arabia’s pattern changes after the vision 2030 implementation. The primary direction taken in this analysis is to prove that the H-O factor-price model, in ideal industrialization conditions, best simulates production differences that create comparative advantages in global trade patterns.
Factor Price Structures and the Heckscher-Ohlin (H-O) Model
Factor-price structures explain why some nations flood global markets with specific commodities while others sell different goods. The explanation is based on the H-O model, which explains comparative production advantages based on the economization of either labor or capital as production factors. The model’s ideal comparative advantage works with two countries, with two commodities, and working with the two factors (labor and capital) to produce goods for trade (Beck, 2020). Moreover, the model is based on the assumption that nations around the globe share similar production technologies, the comparative advantages being differences in quantities and economization of production factors (Koch & Fessler, 2020). For instance, a notable comparative advantage between two industries engaging in inter-industry is the capital-labor ratio used to produce industrial commodities. The ratio denotes the quantity of capital to that of labor used for the production process (Koch & Fessler, 2020). Therefore, the H-O is a reliable model for explaining that capital-labor ratios will always be different, especially for producing different commodities in the same country. Whereas one could be labor-intensive, the other possibly become capital-intensive (Carbaugh, 2019). The key takeaway from this explanation is that nations tend to produce commodities whose economies of scale are favorable based on available resources.
Resource endowment or capital abundance is a critical production factor because it dictates the choices of commodities that a country can export to external markets. The H-O theorem explains that resource-endowed countries have more comparative advantages over capital-scarce trading partners. The implication is that nations with more resources will tend to produce capital-intensive commodities which fetch better market prices (Carbaugh, 2019). Relative resource endowments create ripple effects in production and trading patterns, resulting in differences in comparative advantages. That is, the differences in relative resource endowments cause variations in prices that affect relative product costs in the market; hence, the comparative advantage dynamics and pattern shifts in the market (Carbaugh, 2019). The factor-price structures affect trading patterns since a country will tend to export commodities they have in abundance while importing those that are scarce within its borders (Koch & Fessler, 2020). Differences in trading patterns are elaborate between developing and developed economies due to the variations in resource-to-labor endowment characteristics.
Challenges Encountered by A Developing versus A Developed Nation
Capital-labor ratios and resource availability factors define the differences in production capabilities between developing and developed nations. The H-O model defined production factors as either capital- or labor-intensive, implying that some countries can be low on resource endowment but labor abundant. Brönner et al. (2020) observed that most developing countries are labor abundant but with poor standards for exploiting the human capital, making the production factor nearly unregulatable. Low capital endowment in developing countries denies them the comparative advantage in global markets because companies have to endure small production quantities from business takeoff. Brönner et al. (2020) added that companies must wait for lengthy periods entangled in unprofitable production until the investment breaks even. Benghida (2017) observed that low comparative advantages for less capitally endowed developing countries affect competitive market prices, production wages, and rents which drive productivity back home. Therefore, lower comparative advantages for developing countries have characterizable ripple effects on labor and capital, which are the critical production factors in the H-O model.
Developed countries’ primary challenge is the ratio of relative capital to labor endowment, where most countries are capital intensive but low on labor. Since the H-O model explains that resources cost less in countries where it is abundant compared to less abundant, developed nations tend to spend more on labor than developing economies (Koch & Fessler, 2020). Developed countries face limited comparative advantage per industry, with significant limitations on producing labor-intensive goods. The nations will tend to produce capital-intensive commodities but fail to be as competitive as labor-abundant countries when producing labor-intensive goods (Carbaugh, 2019). The implication is that developing economies like the Kingdom of Saudi Arabia can improve comparative trading advantages by focusing on labor-intensive ventures since they have abundant human capital but low resource endowment.
Kingdom of Saudi Arabia: Vision 2030 Comparative Advantage
The Kingdom of Saudi Arabia is a developing or emerging high-income economy whose path to being a developed economy is currently defined by the Kingdom’s Vision 2030 economic framework. Three strategic themes guiding the Kingdom of Saudi Arabia towards the apex of global economic development are a vibrant society and a thriving economy supported by an ambitious nation (The Embassy of the Kingdom of Saudi Arabia, 2022). The Kingdom’s economic framework features planned changes such as privatizing state-owned assets, revitalizing underdeveloped industries, and enriching the Kingdom’s education system to improve employable skills (The Embassy of the Kingdom of Saudi Arabia, 2022). Translated to the H-O model, the Kingdom of Saudi Arabia is improving capital and labor endowment in equal measures to boost its comparative advantage in global trade.
The Kingdom’s Vision 2030 implementation shows capabilities of unlocking potential non-oil sectors, a move that will optimize labor and capital endowments for a better comparative trading advantage. The implication is that the Kingdom will have alternative commodities in the revamped renewable energy, manufacturing, and tourism sectors to supplement the oil trade (Saudi Vision 2030, 2022). The Kingdom of Saudi Arabia will have a comparative advantage over manufactured commodities like speedboats and luxury automobiles if it fully implements Vision 2030 (Saudi Vision 2030, 2022). Being a developing economy, the Kingdom will need to boost capital endowment and attractive employment regulation policies that would promote human capital availability and boost labor- and capital-intensive ventures.
Conclusion
Factor-price structures define global trade patterns where the Heckscher-Ohlin theorem provides the most simplified model for understanding production investment. Opportunities available for capitalizing on competitive trade advantages depend on capital and labor endowments for commodity producers, where intensive producers with relatively abundant production factors tend to be exporters. Countries import commodities whose production is intensive, yet capital availability is relatively scarce. Comparative advantages depend on how a country can balance capital-labor ratios in commodity production. The Kingdom of Saudi Arabia’s Vision 2030 will balance industry productivity by boosting capital-labor ratios in manufacturing and renewable energy to produce luxury automobiles as supplements to the oil commodity.
References
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