Wheat Industry of United State and Textile Industry of China;

“Analyzing that the trade theory of comparative advantage is superior to

the trade theory of absolute advantage to understand the business in
international economy”

Prepared by:
Rezaul Huda
University of Southern Queensland
Australia 2007
 Table of Contents

Table of Contents..................................................................... ....................2

1. Abstract:.............................................................................. ....................3
2. The issues: ..................................................................................... .........3
3. Overview of Textile industry: .................................................... ...............3
3.1 The Textile industry of China:.......................................................... .......4
5.1 Ricardian Model Highlights:.................................... ...............................7
5.2 Justification:.......................................................................... .................7
5.3 Findings: ................................................................... ............................8
6. Conclusion:....................................................................... .......................9
List of Reference: ..................................................................... .................10
1. Abstract:
The trade theory has typically distinguished according to positive or normative analysis.
The positive theory seeks to understand the determinants of the pattern of trade and the
terms at which trade takes place. The normative seeks to ascertain whether individuals or
countries gain or lose by trading. The study is establish to examine concerning the
competitive advantage is superior than absolute advantage to trade theory considering the
wheat industry of United State and the textile industry of China.

2. The issues:
The trade theory, Absolute and comparative advantage for textile industry considering
China and Mexico, Analyzing the trade theory of comparative advantage is superior to the
trade theory of absolute advantage in the international economy.

3. Overview of Textile industry:

The history of development of textile industry as started in Britain as the spinning and
weaving machines, which was invent in that country. High production of wool, cotton and
silk over the world has boosted the industry in recent years. Though the industry started in
UK, still in 19th Century the textile production passed to Europe and North America after
mechanization process in those areas. From time to time Japan, China and India took part in
industrializing their economies and concentrated more in that sector. Japan, India, Hong
Kong and China became leading producers due to their cheap labor supply, which is an
important factor for the industry.

According to statistics, the global textile market possesses a worth of more than $400
billion presently (Economywatch.com). In a more globalize environment, the industry has
faced high competition as well as opportunities. It is predict that Global textile production
will grow by 25 percent between 2002 and 2010 and Asian region will largely contribute in
this regard (WTO).

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3.1 The Textile industry of China:

The textile industry of china is blooming and the comprehensive capacity of its industry is
undergoing all-out progress after years of rapid growth, noting that the advantages of
Chinese textile products be positioned in cultural factors, their improved technology and
sales technique, as well as their low prices. Domestic demand, rather than exports, has been
the key engine of the textile industry. The sales volume of this industry grew 26.78 percent
in the first six months year to year, 4.7 percentage points higher than the growth rate of the
export volume (The National Bureau of Statistics, China). The textile industry in China has
been restructuring and upgrading ever since the 1990s. The textile products have been
especially competitive since 2000 after the industry experience large-scale technological
reform and introduced foreign capital and brands.

Asia is emerging as one of the world powers in textile manufacturing. Three out of the nine
countries with higher exports in textiles and garments are Asian and China is the higher
importer among those countries. The absolute and comparative advantage and disadvantage
of China textile industry has been illustrated blew;

Experienced in the textile industry:

China has been good at making textiles and has been engaged in textile trade for a
long, long time. About 2,000 years ago, the famous Silk Roads were creating both
on land and at sea, through which large quantity of silk was export abroad. China
has been very professional and experienced in the textile industry.

The rich labor recourses:

China's population is as big as 1.3 billion, about 30 times larger than that of South
Africa. It has abundant labor resources. It is another comparative advantage.

Technology & Political support:

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 China joined the WTO (World Trade Organization) in 2002. During all those 15
years when China was fighting for its entry and preparing for its qualification, China
did a great deal of homework to restructure its economy, particularly the traditional
industries like the textile, which lagged far behind the advanced western countries.
For instance, about 15 years ago, many textile factories were still using obsolete
looms made in the 1920s and 30s. In order to make sure that traditional industries of
China would not be knock out by the other developed countries when China enters
into the WTO whose principle motto is free trade, the Chinese government made a
decisive decision to rejuvenate of the textile industry and which remain competitive
in international trade. Figure shows the market share of China in textile industry
after the agreement on textiles and clothing (ATC).

Figure 1

4. Overview of Wheat Industry:

Wheat has been a staple product with the level of consumption largely unaffected by
changes in its price and the price of substitutes (such as rice, maize and oats). Over the past
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20 years, worldwide wheat consumption has been growing on average at a stable 1% per
annum. Total world consumption is around 595 million tons per year and this expected to
continue grow over the coming years. The global wheat trade represents a combination of
both food and feed demand - food demand for wheat is generally stable and only minimally
responsive to price fluctuations, however, feed demand is variable to grain trade patterns.

4.1 The Wheat Industry of United State:

Wheat is the largest grain crop in United State. United State is one of the four largest wheat
exporters in the world, along with the Australia, Canada and the EU. The level of wheat
export is essentially determining by the wheat production. With domestic consumption
being relatively stable over time (at about 5.5 million tons per annum), and the level of
exports over the past five years has averaged 17 million tons per annum. Most wheat
varieties grown there in autumn grow rapidly during the spring months and mature from
early to mid-summer. The wheat grown in United State is predominantly white grained.
This, together with strict quality control standards, has ensured that US has an excellent
reputation in the international market and allows differentiating its wheat from that of other
major exporting countries. Over the last 20 years, wheat production has varied between 9
million tones and 25 million tons per annum, with the average over this period being 16
million tons a year. Figure 2 shows the average wheat export flows among the world.

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Figure: 2 (Source: FAO (Food and agriculture organization of the united nation), 2005)

Figure two shows that the United State export wheat to the European Union 497 thousand
and to other country 32,416 thousand metric tons which large amount is comparing to other
exported country. There are three major comparative advantage boost US wheat industry,
the three things are land, capital and technology.

5. Analysis:
This analysis has done based on Ricardian model and hypothetical data of wheat industry of
United State and the textile industry of China.

5.1 Ricardian Model Highlights:

The key factors of this model are “one trade occurs due to differences in production
technology, third trade is advantageous for everyone in both countries third even a
technologically inferior country can benefit from free trade and forth a developed country
can compete against some low foreign wage industries”.

5.2 Justification:
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The textile industry of United State faces intense import competition. However,
employment in this industry in the United States fell from about 1.5 million people in 1991
to less than 1 million in 2000; due to increased imports from Asia sales per employee is
$140,000. In comparison, the average worker in China produces $9,000 of sales per year in
the textile industry. Thus, a worker in the United States produces 16 times more than a
worker from China. Figure 3 shows the comparison between the wheat industry and the
textile industry of united state and china.

Figure: 3 (Hypothetical data and author illustration)

Another industry is wheat, typical wheat farmer in United State allocate only 1.35 hours per
acre to growing a crop of wheat, and an acre provides 37 bushels of wheat. This works out a
marginal product of 37/1.35 = 27.5 bushels per hour of labor. In comparison, the typical
wheat farmer in China obtains only one-tenth of a bushel per hour of labor, so the U.S.
farmer is 27.5/0.1 = 275 times more productive.

5.3 Findings:
The United States has an absolute advantage in all of these industries, but it clearly has the
comparative advantage in wheat. Thus, it exports wheat to the China, while importing
textiles. Therefore, the competitive advantage is much more superior then the absolute
advantage.

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6. Conclusion:
China and United State is one of the leading economies in the world and the wheat and
textile industry are the most competitive industry in present global economy. After Second
World War, technology advancement and different political issue such as tariff the
international trades become much more competitive and complex. There are different
country are going trade with different country, some country has advantage in different
industry. Those countries have competitive advantage to any specific industry they only can
move toward to international tread to gain sustainable economic state. Therefore, for any
industry the competitive advantage is superior to the trade theory to understand the business
economy.

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