INTRODUCTION

The notion that international and interregional trade flows are related to systematic, country specific, differences in technological knowledge has a long history in economic thought. This line of thought can be traced from David Hume to David Ricardo, and from Ricardo to modern technology gap theory. If unifying themes can be found in this disparate body of thought, it is in the non-public good aspect of technology, and in the link between trade patterns and macroeconomic outcomes. The mainstream view of technology and trade suggests that technology's importance in determining trade flows diminishes over time because of the easy of technology transfer. The transfer of new technological innovations allow theorists to assume that each country maximizes welfare according to identical production functions. Technology gap theory, while it allows for the important public good aspect of technology, views technological asymmetries as important long run determinants of trade flows. Moreover, it also captures interactions between trade flows and changes in long run growth patterns and levels of employment.

This paper attempts to review the current state of the theoretical and empirical literature in technology gap theory. We utilize an aspect of the existing theoretical literature to more fully link the interaction between comparative and absolute advantage in technology gap models. Our discussion of the empirical literature generates ideas and suggestions for future research into the overall importance of technological asymmetries in determining both industry net trade flows and each country's overall trade balance.

The rest of the paper is organized as follows: section 2 reviews the theoretical literature and develops a model of technology gap that links comparative and absolute advantage into a single explanation of trade flows. Section 3 critically reviews the empirical literature, and section 4 provides suggestions for future research into the role played by sector specific technological gaps in determining trade flows.

THEORY

In The Beginning: A Suggestive History

A review of the literature of any field in economics can begin virtually anywhere. The analysis of the origins of concepts and theories are often limited not by accurate historical accounts but by limited space, time and interest of the authors. This brief history will attempt to outline two of the important beginnings of modern technology gap theory by first reviewing the origin of an important conceptual link between the dynamic and once-and-for-all static gains from trade, and second, by developing a model of technology gap that was first written by Josiah Tucker in the mid-1700s. As will become clear, Tucker was the first writer to posit a “formal” model which made use of dynamic gains from trade in accounting for the evolution of trade patterns. In other words, Tucker developed cumulative causation model of trade in which the gains provided by specialization from trade create new opportunities for further growth and trade.

Mercantilist writers have been lauded and criticized in the literature on foreign trade at least since Hume's Political Discourses in 1752. While both have been present in the literature, the latter is by far the more prevalent. Mercantilists have been criticized for everything from their views regarding the gains from trade to their self-promotion of the merchant's role in society as being important. Yet, throughout almost all criticisms of Mercantilist thought lies one “lesson” which is claimed to have been missed by mercantilist writers: the economy naturally tends to full employment. In other words, mercantilist writers of the Thomas Mun stripe, assumed that the economy will generally operate at a pace that leaves resources –land and labor – idle . This “flaw” in the logical foundation of mercantilist thought was not corrected, many stories go, until Hume and Smith set the record straight.

From the perspective of many modern writers that work on technology gap theories, this “flaw” of mercantilist logic proves to be interesting because of a natural link that such logic necessitates. This is the link between international trade and changes in macroeconomic activity. In such models of economic activity, trade flows can influence the aggregate level of employment. As Thomas Mun, the great spokesman of late mercantilism stated:

the true form and worth of forraign Trade [is], The great Revenue of the King, The honour of the Kingdom,The Noble profession of the Merchant, The School of our Arts, The supply of our wants, The employment of our poor, The improvement of our Lands,....
(Mun 1664; 1986: 88, emphasis in original)

With this link between an economic policy and economic activity in mind, Mun made an interesting distinction between “Natural” and “Artificial” wealth. Natural wealth “proceedeth of the Territorie itselfe”, while artificial wealth “dependeth on the industry of the Inhabitants.” (Mun 1621: 48-9) In Mun's view, natural wealth consisted of what we now call natural resources but also included items such as “Corn, Victuals [grains in general], Hides, Wax, and other natural Endowments...” (Mun 1664; 1986: 71). Artificial wealth, on the other hand, consisted of the “Art” or skill and labor which manufactures add to the natural wealth.

The question that most interested Mun in making this distinction was how countries limited in natural wealth (Holland) could compete in international markets with countries such as England which were abundant in natural wealth. Mun's answer was that abundance of natural wealth makes the people of the country lazy, uninventive, and cowardass. While the lack of natural wealth “enforceth Vigilancy, Literature, Arts and Policy” (Mun 1664; 1986: 82). Thus, the issue for Mun was to break this vicious link between a state of “general leprosie” and abundance of natural wealth. For, “our wealth might be a rare discourse for all Christendome to admire and fear, if we would add Art to Nature, our labour to our natural means...” (Mun 1664; 1986: 73).

From a modern perspective, it is tempting to conclude that Mun was grasping for a distinction between resources that exhibit diminishing returns and those that exhibit increasing returns. While no evidence of this exists, it is true that such a distinction was to be made in the 1750s by Josiah Tucker in his development of a logical model of trade based on technology gaps.

Tucker was profoundly interested in the relationship between the growth of poor countries and that of rich ones such as, his homeland, England. Specifically, several writers had expressed concern that England's export markets would be taken over by poorer countries that could produce goods cheaper because of their lower wages and other costs. Tucker responded with an increasing returns argument that demonstrated the cost advantages of richer countries in the production of the most complex commodities:

[the rich country possesses] established Trade and Credit, large Correspondences, experienced Agents and Factors... also a great Variety of the best tools and Implements in the various kinds of Manufactures, and Engines for abridging Labour;--add to these good Road, Canals, and other artificial Communications... And in respect to Husbandry and Agriculture, it is likewise in Possession of good Enclosures...great Stocks...a great Variety of Plows, Harrows, &c. suited to the different Soils; and...every other superior Method of Husbandry arising from long Experience...
(Tucker 1974: 30, emphasis added)

Each of these stocks that allow the rich country to undersell the poor one at any point in time also set the conditions for further gains. Thus, the rich country not only has the best tools and technologies, but also the “superior Skill and Knowledge (acquired by long Habit and Experience) for inventing and making of more.” (Tucker 1974: 31) Moreover, the rich country need not rely only on the “genius” of its own manufacturers and farmers to maintain this pace of innovation. The high wages, easier access to capital, and greater “Exertion of Genius, Industry, and Ambition” will cause the best and brightest of the poor countries to emigrate to the rich ones, draining the “Flower of its [the poor countries] inhabitants.” (Tucker 1974: 32) This brain drain opens “larger Correspondencies; – it presents us...with the Inventions and Sagacity of other Nations, creates more Imployment for the Natives, helps and improves our old Manufactures, and sets up new ones; – thus impoverishing our Rival, and the same Time that it enriches ourselves.” (Schuyler 1931: 81)

From this analysis of markets, one may conclude that the rich country will come to dominate all trades, leaving no export markets for poorer countries. However, this is a mistaken presumption. Tucker seems to have had some rudimentary notion of the principle of comparative advantage in the sense that he understood that one country could never dominate all markets. Based upon his knowledge of scarcity and his increasing returns philosophy, Tucker developed a technology gap theory of trade in which a country is competitive in goods based upon some relation between the complexity of the good's production process and the country's level of development. Poor countries produce simple commodities cheaply, while the more complex commodities are cheaper in the rich countries. “[I]t may be laid down as a general Proposition, which very seldom fails, That operose or complicated Manufactures are cheapest in rich Countries; and raw Materials in poor ones: And therefore in Proportion as any Commodity approaches to one, or other of these Extremes, in that Proportion it will be found to be cheaper, or dearer in a rich, or a poor Country.” (Tucker: 36, emphasis in original). This may be termed Tucker's general rule of trade.

The logic of Tucker's model leads us directly to a modern model of technology gap within a comparative advantage framework developed in Krugman (1990).