CARIFORUM and UK EPA Study

7. An analysis of what a country can trade and what opportunities can be gained from entering into a trade agreement, must take into account the country’s factor endowments. However, as noted by Cadot, Carrère, & Strauss-Kahn (2011), “the relationship of endowments, trade, and growth is a complex and imperfectly understood one”. This data is difficult to come by and in the level of aggregation and frequency required. Given the unavailability of this data, the Revealed Comparative Advantage (RCA) is used to determine not only what a country can trade but also what it can potentially trade. Though Comparative advantage, as developed in neoclassical trade theory, tells us why nations trade, it has been posited that it tells little about how a nation should conduct its trade policy, notwithstanding the fact that it has been shown that comparative advantage has implications for the design of such trade policies (Costinot, Donaldson, Vogel, & Werning, 2015). Given the difficulty of estimating comparative advantage based on factor endowments, the measure developed is that of a Revealed Comparative Advantage (RCA), which was refined by Balassa (1965) and became a veritable workhouse of trade analysis, using actual trade flows to “reveal” strong industries or weak industries. Though it is not without its disadvantages, it has been the corner stone of economic analysis of trade policy since it was developed. Functionally, the RCA is measured as the share of a given industry in total exports relative to the industry’s share in total world exports. The Study relies on the Index developed by UNCTAD 34 , which is based on the use of trade data to determine the RCA to unearth differences in countries productivity, and notably “can be used to provide a general indication and first approximation of a country's competitive export strengths”. Simply put, an RCA greater than one (1) infers that the country is a relatively competitive producer and exporter of a given product(s) and its export strength lies in that product(s). Where the RCA is less than one the opposite is true.

34 UNCATD provides data by country and product line for an RCA Index and gives Radar plots of a countries comparative advantage at a point in time.

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