Panel discussion on Bhutan’s trade patterns

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[00:00:01][music] [music] >> Greetings to all.

[00:00:15]Today, we will be analyzing the evolution from the mercantilist approach to the factor endowment model Our goal is to determine which of these models best explains the great success of Japan as long as we consider the two models.

[00:00:35]This debate will be looked at in two I'd like to invite panelist one, Lelo Motu, to talk about the classical foundation of trade.

[00:00:44]Uh thank you. One of the earliest trade theories was mercantilism, which argued that a nation became wealthy by accumulating gold and silver through exporting more than it imported. Trade was seen as a zero-sum game, where one country's gain meant another country's loss. As a result, governments imposed tariffs and strict trade controls.

[00:01:06]This idea was later challenged by Adam Smith through the theory of absolute advantage. Smith argued that countries that should specialize in producing goods they can make more efficiently than others and trade for the rest.

[00:01:21]For example, Bhutan has an advantage in hydroelectricity production, while India is more efficient in agriculture. By specializing and trading, both countries benefit.

[00:01:33]Unlike mercantilism, Adam Smith showed that trade can be mutually beneficial rather than competitive.

[00:01:40]However, this theory could not explain trade when one country is less efficient in producing all goods, which was later addressed by David Ricardo.

[00:01:49]>> Thank you. Thank you for explaining the classical view of trade. Now, let's go deeper into how trade still benefit countries even if one nation is less efficient. Now I would like to invite panelists to Namgay Wangmo to talk on that.

[00:02:04]Thank you. While absolute advantage explains trade when one country is trading more efficient, it does not answer an important question.

[00:02:13]Uh what happens if a country is less efficient in producing everything? This is where David Ricardo's comparative advantage theory becomes very important.

[00:02:23]David Ricardo's comparative advantage theory explains that countries benefit from trade when they specialize in producing goods with the lowest opportunity cost, even if they are less efficient in producing everything overall.

[00:02:36]In Bhutan's case, this theory best explains our hydropower trade with India.

[00:02:42]Although Bhutan may produce many goods more efficiently, Bhutan has a lower opportunity cost in electricity generation because of its abundant rivers and hydropower potential.

[00:02:54]Therefore, Bhutan specializes in exporting electricity while importing goods such as food, fuel, machinery, and technology from India and other countries. So, this specialization allows both countries to benefit from trade through more efficient allocation of resources.

[00:03:12]Thank you for clearly explaining the concept on comparative advantage. Now I would like to invite panelists for Tenzin Sonam to talk about move from individual efficiency to research uh resource-based trade theories.

[00:03:27]While Ricardo focused on labor, the Heckscher-Ohlin theory looks at a factor endowment like capital and land.

[00:03:34]Uh it predicts that a nation will export goods that uses its uh relatively abundant and cheap factors intensively.

[00:03:44]In a developing context, a resource-rich nation should uh export resource-intensive goods and import capital intensive ones.

[00:03:55]Now that we have understand modern trade theory, let's see how this idea applies to the general trade situation. Now, I would like to invite analyst for Kingdom As an data specialist, could you provide us with the empirical evidence regarding Bhutan's current trade position and its level of interdependency?

[00:04:19]Thank you for having me here. So, as a small nation, Bhutan exhibits a very high level of interdependency. So, looking at the 2023 data, the import of the GDP rate is approximately 0.5 which is of 50% which is significantly higher compared to the large economies like India and USA for around 0.25 and 0.16 respectively. So, this indicates that the trade is absolutely vital for a nation like ours.

[00:04:48]Furthermore, our trade is heavily concentrated. India is our number one party for both the imports and exports followed by other national parties like Bangladesh for exports and China for imports. So, if you look at the data for Bhutan, major exports beside electricity, we have silicon as a leading commodity yield approximately 13.8 million metric ton followed by ferrosilicon, dolomites, and boulders. So, these are all resource intensive products because Bhutan is abundant in natural natural land and minerals endowment.

[00:05:25]The HO model currently predict that we would specialized in the export in and export these mineral space commodities.

[00:05:35]Thank you so much for your response. To move on let's discuss which trade best explains Bhutan's trade patterns.

[00:05:44]Based on the data I've collected, it strongly supports the Heckscher-Ohlin model.

[00:05:49]Bhutan is abundant in natural resources, mineral and land, and relatively abundant in labor compared to high technology capital.

[00:05:59]Therefore, we export resources intensive silicon and minerals while importing capital intensive technology like smartphones and processors unit.

[00:06:11]I agree, but we cannot ignore comparative advantage. Our trade in hydropower of having a low opportunity cost in energy production relative to our neighbors, which forms the basis for our most significant trade relationship.

[00:06:26]Uh so, this is explained by the new trade theory and the concept of uh economies of scale. So, high-tech manufacturing requires the last large-scale operations to keep the per unit cost very low. So, Bhutan's top imports includes uh processors unit for about 4 million and smartphone for approximately 2.2 million. So, additionally, our largest scale import is light bulbs and preparations uh exceeding about 9.5 million. So, because we lack a massive industrial scale needed to produce these differentiated products uh efficiently, we must import them from the large economies that benefit from the increasing uh returns to scale.

[00:07:03]So, this confirms that while uh factor endowment explains our import, the new trade theory explains our uh reliance on the import complex and differentiated technologies. Oh. Thank you all for your meaningful insights. Now, if audience have any questions, then feel free to ask.

[00:07:26]Uh my question is, how does the Heckscher-Ohlin theory explain Bhutan importing products like smartphones instead of producing them domestically?

[00:07:38]The Heckscher-Ohlin theory explains this through a factor endowments. Uh Bhutan is relatively abundant in natural resources and hydropower, but we lack advanced cap- uh but we lack advanced capital, large-scale industries, and high-technology manufacturing capabilities.

[00:07:57]Smartphones require uh skilled technology labor technological labor, sophisticated machinery, and heavy capital investment.

[00:08:06]Since the countries like China have these factors in abundance, they can produce smartphones more efficiently and at lower cost. Therefore, Bhutan import these capital-intensive goods while exporting products that rely more on our available resources, such as minerals and electricity.

[00:08:28]Why was mercantilism eventually criticized and replaced by new theories like absolute advantage?

[00:08:36]Uh thank you for the question.

[00:08:38]Mercantilism was criticized because it viewed trade as a zero-sum game, where one country could only gain if another lost. It focused too much on accumulating gold and restricting imports through tariffs and control.

[00:08:52]Adam Smith argued that this limited economic growth and efficiency.

[00:08:56]Through the theory of absolute advantage, he showed that countries benefit more when they specialize in producing goods that they can efficiently make and then trade freely with others. This creates mutual gains for all trading nations, rather than benefiting only one side.

[00:09:15]To summarize, we are a classical model like comparative advantage explains why we trade electricity against other countries that exist the title of our competitive trade based on our new values factor endowments. We can relate a bad example of how small nations migrate to successful advantages to mitigate the world loans.