Comparative advantage and trade competitiveness in Hungarian

agriculture

Imre Fertő

Abstract
The comparative advantage, price and quality competition, and non-price competitiveness in
agro-food trade for Hungary on the EU-15 markets have been analyzed between 1995 and
2002. The paper investigates comparative advantages and categories of competitiveness in
trade data, magnitude and dynamics of comparative advantages and different competition
categories, their dynamics, causalities and consistencies. We have found that Hungary
experiences greater number of products with comparative trade disadvantages and much
greater significance of one-way imports. The duration rate to stay the comparative advantage
is a bit longer than the duration rate to stay the successful price competition or successful
quality competition or one-way export. This confirms that the comparative advantage
captures more stable long-run structural features of the sector and economy than trade
competitiveness measures. Hungary has comparative advantages for several agro-food
products, particularly for bulk raw commodities, processed intermediates, and horticulture,
with the greatest significance of successful quality competition and one-way exports, and the
lowest significance of unsuccessful price and unsuccessful quality competition.

Introduction

During the last half of century applied trade literature has developed three main concepts for
measuring comparative advantages, trade specialization, and trade competitiveness: revealed
comparative trade advantage measures (e.g., Liesner, 1958; Balassa, 1965; Vollrath, 1991;
Hinloopen and van Marrewijk, 2006), intra-industry trade indices (e.g., Grubel and Lloyd,
1975; Greenaway et al., 1994, 1995; Fontagné et al, 1997), and categories of price vs. quality
and non-price competitiveness (e.g., Aiginger, 1997, 1998; Gehlhar and Pick, 2002; Bojnec
and Fertő, 2007). So far little attention and limited research is available to bridge these strands
in applied literature. This motivated our research to classify trade types, complementarities
and consistency between measures of comparative advantages, intra-industry trade indices,
and trade competitiveness categories in the case of agro-food trade.

It is known from the literature that measures of comparative advantages and intra-industry
trade are more clearly defined than measures of competitiveness both theoretically and
empirically (e.g. Porter, 1990; Krugman, 1994; Kennedy et al., 1997). The theory of
comparative advantage predicts that trade flows exist as a result of relative cost differences
between trading partners. It suggests that countries are competitive in goods and services in
which they have a relative cost advantage. The comparative advantage captures structural
features of the sector and economy, which are more stable in long-run. The only difference
between comparative advantage and competitiveness is that the latter includes also market
distortions. Barkema et al. (1991) emphasized the role of distortion in agricultural markets and
thus asserted that competitiveness takes a more realistic view about the world. The
competitiveness is changing in short-run under impacts of different sector-specific,
macroeconomic and other influences that can be related to market and policy distortions with
associated transfers such as from the use of agricultural subsidies. Lafay (1992) explains two
significant differences between comparative advantage and trade competitiveness. Firstly,
competitiveness usually involves a cross-country comparison for a particular product, whilst
comparative advantage is measured between products within a country. Secondly,
competitiveness is subject to changes in macroeconomic variables, whereas comparative
advantage is structural in nature. Thus empirical analyses that focus on comparative
advantage and trade competitiveness may lead different results as a reason for inconsistencies
and dissimilarities in results and findings (e.g. Fertő and Hubbard 2003). However,
comparative advantage and competitiveness share all interdependencies and dynamic aspects
of an economy. According to Aiginger (1998) their might be some significant
complementarities and consistencies in measures of comparative advantage and trade
competitiveness.

The main novelty of this paper is in clear differentiation between price, quality and non-price
competitiveness in trade data combining the knowledge from trade competitiveness
(Aiginger, 1997, 1998; Gehlhar and Pick, 2002) and intra-industry trade literature
(Greenaway et al., 1994, 1995; Fontagné et al, 1997), and bridging the gap in applied trade
literature establishing complementarities and consistencies between comparative advantages,
categories of price and quality competition in two-way matched trade flows, and categories of
non-price competition in one-way trade flows. As empirical applied examples are employed
data on agro-food trade between Hungary and EU-15 member countries. The paper
investigates comparative advantages and categories of competitiveness in trade data,
magnitude and dynamics of comparative advantages and different competition categories,
their dynamics, causalities and consistencies.

The rest of the paper is structured as follows. In the next section we explain methodology and
data used. After then we present the empirical results of the nature of comparative advantages,
price and quality competitiveness, and one-way trade. We describe the evolving pattern in
magnitude, structures, and dynamics of agro-food trade in Hungary employing recently
developed empirical procedures based on the modified revealed comparative advantage index
proposed by Vollrath (1991). We separate the one-way trade from the two-way price
competition and quality competition trade categories adopting Gehlhar and Pick (2002) to
investigate successful price and successful quality competition categories in the matched two-
way trade flows. Then we check the consistency and similarity between revealed comparative
advantage and trade competitiveness. The final section concludes.

Methodology and data

The nature of comparative advantage and trade competitiveness are the main methodological
approaches that are applied in this paper. The ability to compete in international and domestic
markets depends on price competitiveness and/or product quality in two-way matched trade or
on some other factors that are important for one-way trade. Export-to-import unit value
approach and trade balance allow us to investigate the price and quality competitiveness in
two-way trade. In addition, employing trade data this can contribute to a better understanding
of the evolution in the revealed comparative advantage of Hungarian agro-food sector.

The concept of ‘revealed’ comparative advantage was introduced by Liesner (1958), but
refined and popularized by Balassa (1965) and therefore known as the ‘Balassa index’, is
widely used empirically to identify a country’s weak and strong export sectors. Porter (1990)
uses it to identify strong sectoral clusters, Amiti (1998) analyses specialization patterns in
Europe, Proudman and Redding (2000) and Redding (2002) focus on the dynamics of
comparative advantage, Bojnec (2001) analyses agricultural trade, Hinloopen and Van

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Marrewijk (2001, 2004) study the dynamics of the empirical distribution of European and
Chinese trade, and Fertő and Hubbard (2003) analyze comparative advantage and trade
competitiveness in Hungarian agro-food sectors. The Revealed Comparative Advantage
(RCA) index is defined by Balassa (B) (1965) as follows:

B = (Xij / Xit) / (Xnj / Xnt)

where X represents exports, i is a country, j is a commodity, t is a set of commodities, and n is

a set of countries. B is based on observed trade patterns. It measures a country’s exports of a
commodity relative to its total exports and to the corresponding export performance of a set of
countries, e.g., the EU-15. If B>1, then a comparative advantage is revealed.

Vollrath (1991) offered an alternative specification of revealed comparative advantage, called

by the relative trade advantage (RTA), which accounts for exports as well as imports. It is
calculated as the difference between relative export advantage (RXA), which equates to the
Balassa (B) index, and its counterpart, relative import advantage (RMA):

RTA = RXA-RMA
where,

RXA = B

and

RMA = (Mij / Mit) / (Mnj / Mnt)

where M represents imports. Thus,

RTA = [(Xij / Xit) / (Xnj / Xnt)] – [(Mij / Mit) / (Mnj / Mnt)]

If RTA>0, then a comparative advantage is revealed, i.e. a sector in which the country is
relatively more competitive in terms of its trade. Similarly as the RXA=B index, the RTA is
based also on observed trade patterns. It measures a country’s exports and imports of a
commodity relative to its total exports and imports, respectively, to the corresponding export
and import performance of a set of countries (EU-15), which are used as the benchmark of
comparison. We classify RTA index in three categories: RTA < 0 refers to all those product
groups with a comparative trade disadvantage. RTA = 0 refers to all those product groups in a
break even point without trade advantage or trade disadvantage. RTA > 0 refers to all those
product groups with a comparative trade advantage. These boundaries are consistent with
theoretical interpretation appropriate for cross-country comparisons.
Besides the nature of comparative advantage, we also employ the methodological approach
that distinguishes between price and quality competitiveness in matched two-way trade from
non-price competitiveness in the one-way trade. Unit values of exports and imports by
products have been used for assessing price competitiveness and product quality in two-way
matched trade data (e.g. Abd-el-Rahman, 1991; Aiginger, 1997; Ulff and Nielsen, 2000).
Aiginger (1997, 1998) and Gehlhar and Pick (2002) employ the unit value difference and the
trade balance by product to categorize trade flows in four categories:
x m
Category 1. TB ( i , j ) > 0 (or X ( i , j ) > M ( i , j ) ) and UVD (i , j ) < 0 (or UV (i , j ) < UV (i , j ) )
x m
Category 2. TB ( i , j ) < 0 (or X ( i , j ) < M ( i , j ) ) and UVD (i , j ) > 0 (or UV (i , j ) > UV (i , j ) )

3
 x m
Category 3. TB ( i , j ) > 0 (or X ( i , j ) > M ( i , j ) ) and UVD (i , j ) > 0 (or UV (i , j ) > UV (i , j ) )
x m
Category 4. TB ( i , j ) < 0 (or X ( i , j ) < M ( i , j ) ) and UVD (i , j ) < 0 (or UV (i , j ) < UV (i , j ) )

where the trade balance ( TB ( i , j ) ) is calculated as TB ( i , j ) = X ( i , j ) - M ( i , j ) where X ( i , j )

is the value of the i-th product exports from a home (domestic) country (CE-5, respectively)
to the j-th partner country (EU-15) and M ( i , j ) is the value of the i-th product imports to the
home country from the j-th partner country. In other words, one country’s exports are another
country’s imports, and vice versa. The unit value difference ( UVD ( i , j ) ) is calculated as
UVD ( i , j ) = UV ( ix, j ) - UV ( m i , j ) where U V ( ix, j ) is the export unit value, which is calculated as
UV ( ix, j ) = X ( i , j ) / Q(xi , j ) and UV ( m i , j ) is the import unit value, which is calculated as
m m x m
UV = M ( i , j ) / Q( i , j ) . In these calculations, Q( i , j ) and Q( i , j ) are quantities of exports
(i, j )

and imports, respectively, between the home country i and the partner country j. Trade
balances indicate successful or unsuccessful competition in trade and export-import unit
values determine price or quality competition. The four price and quality competition
categories approach is applied only on the matched two-way trade flows satisfying the
simultaneous conditions of the unit value difference and the trade balance by product. In the
matched two-way trade flows in the first and third categories the home country i is successful
in price and quality competition, respectively, and vice versa in the second and fourth
categories where the home country is unsuccessful in price and quality competition.

We disentangle the one-way trade from the two-way matched trade. When the one-way trade
occurs then the net direction of trade is either surplus, which consists only from exports or
deficit, which consists only from imports. For the one-way trade we distinguish the two
possible one-way non-price competition categories, i.e. only one-way export category or only
one-way import category, that occur when holds the following conditions (Bojnec and Fertő,
2007):
m
Only export category: TB ( i , j ) >0 (or X ( i , j ) >0, M ( i , j ) =0) and UV (i, j ) =0
x
Only import category: TB ( i , j ) <0 (or X ( i , j ) =0, M ( i , j ) <0) and UV (i , j ) =0 .

Moreover, our investigations are focused on the stability and duration of the RTA indices and
trade competitiveness categories over time for particular product groups by the survival
analysis (Jenkins, 2005). Furthermore, the consistency of the RTA indices with trade
competitiveness categories is analyzed by a stratified Cox proportional hazard model.

The duration analysis of comparative advantage and trade competitiveness categories is

estimated by the survival function, S(t), across product types by using the nonparametric
Kaplan-Meier product limit estimator. We assume that a sample contains n independent
observations denoted (ti; ci), where i = 1, 2,…, n, ti is the survival time, and ci is the
censoring indicator variable C taking a value of 1 if failure occurred, and 0 otherwise of
observation i. Moreover, we assume that there are m < n recorded times of failure. The rank-
ordered survival times are denoted as t(1) < t(2) < … < t(m). Yet, nj denotes the number of
subjects at risk of failing at t(j) and dj denotes the number of observed failures. The Kaplan-
Meier estimator of the survival function is then:

n j −d j
Sˆ (t ) = Π ,
t ( i ) <t nj

4
with the convention that Sˆ (t ) =1 if t < t(1). Given that many observations are censored then
we note that the Kaplan-Meier estimator is robust to censoring and use information from both
censored and non-censored observations.

Finally, we also conducted the consistency tests as a cardinal measure between pairs of
comparative trade advantage (RTA indices) and trade competition types’ categories. We
estimate a stratified Cox proportional hazard model:

hs(t, x, β)=hs0(t)exp(x’ β),

where x denotes a vector of explanatory variables and β is to be estimated. The baseline

hazard, hs0(t), characterises how hazard function changes as a function of time and is different
strata, s.

To conduct the empirical analysis on comparative advantages and trade competitiveness types
in the CE-5 agro-food trade, respectively, with the EU-15, we use detailed trade data from
Organisation for Economic Cooperation and Development (OECD) by the years 1995-2003.
Agro-food trade is defined by EU-Commission (1999). Sample consists of 255 items at four-
digit level in Standard International Trade Classification (SITC) system. Following Chen et
al. (2000) we classify agro-food trade into four commodity groups: bulk raw commodities,
processed intermediates, consumer-ready food, and horticulture.

Empirical results
Comparative advantage and trade competitiveness in CE-5 countries

Our results indicate a large variation in the RTA indices (Table 1). Negative value of median
indicates that the greater number of agro-food products experience RTA < 0 on the EU-15
markets. According to the degree of processing, the RTA is negative for consumer-ready
food. Hungary explores comparative trade advantage for bulk raw commodities, processed
intermediaries and for horticulture.

Table 1 Description statistics for RTA (1995-2003)

RTA
Maximum 644.27
Minimum -
544.48
Standard deviation 77.18
Median -0.03
Mean value 4.02
RTA<0 (number of 959
products)
RTA>0 (number of 742
products)
Mean value of RTA
Bulk raw commodities 18.83
Processed intermediates 8.89
Consumer-ready food -6.27
Horticulture 3.04
Source: own calculations based on OECD data

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Two-way trade is prevailing for agro-food products between the Hungary and the EU-15.
Whithin two-way trade the successful quality competition (Category 3) is the most significant
following by the successful price competition (Category 1). Successful price and successful
quality competition represent almost three-fourth of two-way trade in Hungary. Unsuccessful
quality competition is the least significant for Hungary, whilst the share of unsuccessful price
competition (Category 2) is somewhat higher in two-way trade.

Table 2 Classifying trade flows (structures in %, mean values, 1995-2003)

Competitiveness categories Share
One-way trade 7.3
Two-way trade 92.7
One-way export 2.6
One-way import 97.4
Category 1 32.9
Category 2 10.1
Category 3 41.0
Category 4 16.1
Source: own calculations based on OECD data

Duration of comparative advantage and trade competitiveness

We test whether comparative advantage or trade competitiveness is more stable over time
using the duration analysis. Table 3 reports the survival rates for the years 1, 5 and 9 and the
survival rates for the year 9 by product groups. Our results confirm a priory expectation that
the duration of comparative advantages is longer than the duration for the successful trade
competitiveness categories. Within the successful trade competitiveness categories, the
duration of successful price competition is longer than the duration of successful quality
competition and much longer than the duration of the one-way exports. The RTA and
successful price competition are more stable for bulk of commodities and to a lesser extent for
processed intermediates than for consumer-ready food and horticulture. The RTA and the
successful trade competition categories are the most stable for Hungary. These results suggest
the importance of factor endowments and structural determinants for long-term sustainability
of comparative advantages and successful price competition.

Table 3 Kaplan-Meier Survival Rates for comparative advantage and trade competitiveness
Product groups (9 year)
bulk raw processed consumer-
1 year 5 year 9 year commodities intermediates ready food horticulture
RTA>0 0.94 0.65 0.12 0.29 0.12 0.09 0.07
Categories 1
and 3, and
one-way
export 0.93 0.63 0.12 0.23 0.11 0.12 0.04
Category 1 0.91 0.56 0.05 0.16 0.04 0.04 0.02
Category 3 0.90 0.49 0.02 0.01 0.02 0.03 0.02
One-way
export 0.89 0.45 0.00 0.00 0.00 0.00 0.00
Source: own calculations based on OECD data

Consistency between comparative advantage and trade competitiveness

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We want to establish complementarities and consistencies between the measures of
comparative advantages, categories of price and quality competition in two-way matched
trade, and categories of non-price competition in one-way trade. We first present the mean
value of the RTA>0 and RTA<0 by trade competitiveness categories (Table 4). The negative
RTA’s values are (absolutely) the largest for one-way import, the unsuccessful price
competition (Category 2) and unsuccessful quality competition (Category 4). On the other
hand, the positive RTA’s values are the largest for one-way export, the successful price
competition (Category 1) and successful quality competition (Category 3). These results
reveal the consistency between the comparative advantage and the successful price and
successful quality competition and one-way exports on one side, and between the comparative
disadvantage and the unsuccessful price and unsuccessful quality competition and one-way
imports on the other.

Table 4 Mean of RTA by trade competitiveness categories

Category 1 Category 2 Category 3 Category 4 One-way One-way
export import
Hungary
RTA<0 -1.874 -4.76 -4.17 -4.04 -21.41
RTA>0 30.432 0.27 14.03 0.30 42.209
Source: own calculations based on OECD data

The Cox proportional hazard estimates using the trade competitiveness categories and product
groups as a dependent variable are presented in Table 5. Dummy variables for the trade
competitiveness categories are defined as one for the successful competitiveness categories
and zero otherwise. We present the results as hazard rates. An estimated hazard rate
coefficient less than (greater than or equal to) one is interpreted that the variable lowers
(increases or has no impact on) hazard rate. The empirical results confirm our expectations
that being a competitive product this decreases significantly the hazard rate of the
comparative advantage for the trade competitiveness categories. The hazard rate is found to
be lower for trade competitiveness in general than for successful price or non successful price
competitiveness, respectively. The lowest hazard rate can be observed for one-way export.

Table 5 Cox Proportional Hazard Estimates for Competitiveness Groups

Competitiveness groups Product groups
Total bulk raw
Category one-way commoditi Processed consumer-
1 Category 3 export es intermediates ready food horticulture
Hungary 0.15 0.16 0.26 0.00 1.57 1.01 0.82 0.83
p-value 0.000 0.000 0.000 0.000 0.000 0.811 0.004 0.076
Source: own calculations based on OECD data

The hazard rates show a mixed result by product groups by the degree of processing. Bulk
raw commodities increase the hazard rate significantly, while consumer-ready foods
horticultural products lower the hazard rate.

Conclusions

The comparative advantage, price and quality competition, and non-price competitiveness in
agro-food trade for Hungary on the EU-15 markets have been analyzed. The
complementarities and consistencies in measures of comparative advantages and trade

7
competitiveness are clearly confirmed. In our example of agro-food trade between Hungary
and the EU-15 we have found that Hungary experiences greater number of products with
comparative trade disadvantages and much greater significance of one-way imports. The
duration rate to stay the comparative advantage is a bit longer than the duration rate to stay
the successful price competition or successful quality competition or one-way export. This
confirms that the comparative advantage captures more stable long-run structural features of
the sector and economy than trade competitiveness measures. Hungary differs from the other
CE-4 with comparative advantages for several agro-food products, particularly for bulk raw
commodities, processed intermediates, and horticulture, with the greatest significance of
successful quality competition and one-way exports, and the lowest significance of
unsuccessful price and unsuccessful quality competition. Finally, our results confirm that
irrespective that measures of comparative advantages and trade competitiveness are not the
same measure, there is a greater consistency between comparative advantage and trade
competitiveness measures when trade competitiveness types are decomposed at highly
disaggregated trade data. In our specific analyzed case the comparison of measures of
comparative advantages and trade competitiveness and the estimated hazard rates confirm that
the comparative advantage measure is consistent with the one-way export, the successful
price and successful quality competition in two-way trade on one side, and the comparative
disadvantage with the one-way import, the unsuccessful price and unsuccessful quality
competition on the other.

Acknowledgements
The author gratefully acknowledges financial support from the Hungarian Scientific Research
Fund No. 37868 ‘The International Agricultural Trade: Theory and Practice’.

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Author:
Imre Fertő
Ph.D.
Senior researc fellow
Institute of Economics, Hungarian Academy of Sciences
Address: Budapest, Budaörsi út 45, H-1112
Email: ferto@econ.core.hu