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 QueenslandAustralia 2007

Table of Contents

1. Abstract:.......................................................................................................................................3

2. The issues:...................................................................................................................................3

3. Overview of Textile industry:......................................................................................................3

3.1 The Textile industry of China:...............................................................................................4

4. Overview of Wheat Industry:......................................................................................................5

4.1 The Wheat Industry of United State:.....................................................................................6

5. Analysis:......................................................................................................................................7

5.1 Ricardian Model Highlights:.................................................................................................7

5.2 Justification:...........................................................................................................................7

5.3 Findings:................................................................................................................................8

6. Conclusion:..................................................................................................................................8

Figure 1 Textile industry market share............................................................................................5

Figure: 2 Average wheat export flows among the world................................................................6

Figure: 3 Comparison between the wheat industry and the textile industry....................................7

List of Reference:............................................................................................................................9

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:

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, 4

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 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.5

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.

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

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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:

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.

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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.

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

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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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