3. Theoretical Framework and Evolution of Cross-border Economic Zones/
Regions
This section presents a comprehensive overview of the theoretical background and empirical evidences through an analysis of the literature. David Ricardo initially grounds classical international trade theory as so-called comparative advantage in 1817. He states that, other things being equal, a country tends to specialize in and exports those commodities of which it has maximum comparative cost advantage. Similarly the country’s imports will be of goods having relatively less comparative cost advantage (Sumitr and Worabuntoon 2004). Since then the international trade model has been evolving over time influenced by increasing complex factors and technological changes, which have given rise to emergent neo-classical international trade theories. Among others, Ohlin (1933) proposes resources and trade theory, in which trade occurs from the differences of resources between two countries. He states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In the two-factor case, he states a capital-abundant country will export the capital-intensive goods, while the labor-abundant country will export the labour-intensive goods. Tinbergen (1962) rationalizes the gravity
model that bilateral trade between any two countries is positively related to their economic sizes and negatively related to the relative trade costs between them. Krugman (1980) further conceives a home market effect, which is the tendency for large countries to be net exporters of goods with high transport costs and strong scale of production. Hanson and Xiang (2004) conducted empirical research on the home market effect and bilateral trade patterns. They found that in industries with very high transport costs the national market size determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this instance, national market size plus market size in nearby countries determine national exports. To deepen insight on trade for development, Krugman, Obstfeld, and Melitz (2010) suggest a trade model on specific factors and income distribution focusing on three factors namely labor, capital, and territory. They state that a country having capital abundance and less land tends to produce more manufactured products, while a country with territory abundance tends to produce more food. Products and services to be traded are obtained from industries, which use different factors and resources in the production enhancing income distribution.