Factor endowments as predictors of bilateral trade flows between countries

Abstract

Countries enter into bilateral and multilateral trade agreements to exploit the benefits of globalisation, which has enabled the flow and trade of goods and services across multiple markets globally. However, studies focussed on determining the economic factors driving countries to enter into these agreements continue to be limited in literature. Therefore, the aim of this study was to evaluate the influence of factor endowments on bilateral trade patterns between countries. The study applied the Heckscher-Ohlin theorem to explain and understand South Africa’s trade flows with its trading partners. The Heckscher-Ohlin theorem states that differences in countries’ factor endowments affect their comparative advantage, particularly their ability to produce and trade goods for specific industries. Using quantitative research strategy and secondary data collected for the period between the first quarter of 2009 and fourth quarter of 2019, this study applied the standard version of the Heckscher-Ohlin model to determine the extent to which Heckscher-Ohlin forces affect South Africa’s value-added export flows to China. The study also applied the chain version of the Heckscher-Ohlin model to determine the extent to which the chain version of the Heckscher-Ohlin model can predict South Africa’s net trade flows with the rest of the world. Results from the application of the two models were mixed. Both the standard and chain versions of the model found evidence in support of and against the predictions of the Heckscher-Ohlin theorem. In spite of results contradicting predictions of the Heckscher- Ohlin theorem, the standard version of the model was found to be effective in explaining South Africa’s mining and quarrying value-added exports to China, whereas the chain version of the model was effective in predicting South Africa’s manufacturing valueadded exports to the rest of the world. The study contributed to empirical studies aimed at understanding the sources of comparative advantage between countries. Even this study was limited to South Africa, the principles of the Heckscher-Ohlin theorem can be applied to other countries as well.