Rise in variety of imports in US shows the battle for competetive advantage

Shalah Mostashari writes a nice short note on the topic. The author explains that number of varieties in US imports have risen from developing economies. Much of these varieties are similar pointing to rise in competitive advantage amidst developing economies for US market share.

The variety of goods imported to the U.S. has dramatically increased in the past two decades. This growth reflects a widening circle of nations delivering the same goods to this country. In some cases, the U.S. makes its own version of these products—such as Hershey’s chocolate, which is consumed within the U.S. and exported. At the same time, a growing number of competing brands originating from numerous other countries are sold here.

Such increasing variety of trade has been characteristic of many goods. Analyzing this type of commercial activity helps explain how countries and firms gain a competitive advantage, how they organize their production internationally and how quickly they can expand into new product lines.

What is a variety?

It’s important to distinguish between a “good” and a “variety.” In this article, a good is considered a product as defined at the most-detailed level used to track U.S. imports.[1] A variety is a good that originates from a particular country. Thus, French red wine is a variety different from Chilean red wine, even though they may have the same “good’’ classification. This approach assumes that goods are differentiated by country of origin.[2] Admittedly, this definition may not accurately reflect the complete number of imported varieties. For example, within the category of French red wine, there may be a number of imported types with varying characteristics and prices.

Growth in varieties can result from importing a broader range of goods or importing the same good from more countries. Of the 8,870 total possible goods, the U.S. imported 8,414 goods in 2009. Over the past 20 years, the number of goods the U.S. imported ranged from a maximum of 8,503 in 1989 to a minimum of 8,383 in 1992, reflecting little variation in the number of imported goods across time relative to the growth in variety (Chart 1).

On the other hand, the average good was exported by about 12 countries in 1989, compared with about 16 in 2007. The substantial increases in import variety are primarily driven by more countries exporting the same goods the U.S. already imported.

Hmm. The author shows this rise in variety imports is a mix of old and new trade theory:

in the detailed product data, one sees that in many cases the U.S. imports exactly the same goods from relatively less-developed nations as it does from rich, advanced economies. For example, in 2009 the U.S. imported similar nonmilitary turbofan-powered airplanes from Canada, France, Israel and Brazil.[3] Still, goods’ and countries’ characteristics matter. In 2009, 33 countries, including China and the U.K., were exporting men’s leather footwear, but only four countries were exporting those more-technology-intense airplanes.[4] Small and low-income countries export substantially fewer goods, and their exports are still concentrated in low-level manufacturing and labor-intensive industries. 

This suggests that some species of hybrid between “new” and “old” theory may be at work. Peter Schott studied unit cost differentials within a product category across countries and found that unit values vary systematically with exporter resources.[5] For example, China’s average price per pair of men’s leather footwear was $14, but the U.K.’s average price was $149 in 2009. Schott argues that capital- and skill-abundant countries make intensive use of their resources by producing superior varieties that possess added features or higher quality. Low-wage countries export lower-quality and labor-intensive varieties of the same goods and, consequently, sell those products at lower prices. 

Interesting thoughts. These letters from Dallas Fed are very good. They are on topics others than monetary and financial economics. Always interesting to read.

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