Dynamic comparative advantage: Some implications for trade policy in North America

Abstract

This paper explores the implications of changing North American trade policies for dynamic comparative advantage and shows, with examples from the energy and high-technology sectors, how a new policy based on interdependence might work. Newly industrializing countries such as Mexico should aim to break into industries with progressively higher technological and value-added components, such as computer manufacturing—industries that are entering a period of expanded demand and going beyond the period of greatest capital intensity. Although few Mexican firms might be expected to enter such oligopolistic markets alone (at least in the short run), they could combine forces with established enterprises abroad in order to permit gradual market penetration. The examples in the paper illustrate the need for a stable macroeconomic framework for policymaking that includes exchange rates, investment incentives, relative price behavior, taxes, intellectual property rights, labor and environmental regulations, capital market policies, harmonization of standards, and other measures. There is also a need for policies that anticipate the potential private and social returns of activities that might be overlooked in a static framework.