Title: Select a country and examine its actual exports and imports.

Explain
how these fit with the theory of factor endowments

Julianna Vanessa Baptiste

University of the West Indies

2007

International Business Management MGMT (3037)

1
 Abstract

This paper intends to examine whether factor proportions determine the structure of trade in
Trinidad and Tobago. It examines the major imports and exports of the country and determines
whether or not factor endowments are a major indicator of Trade. It also looks at the implications
of the structure of trade in the country of Trinidad and gives some recommendations as to what
could be done to further the level and consistency of exports and imports to Trinidad and
Tobago.

2
 Table of Contents

List of Illustrations……………………………………………………………………………...4

Introduction……………………………………………………………………………………..5

The Theory of Factor Endowments………………………………….......................................7

Heckscher-Ohlin Model Assumptions – Market Structure……………………………...8

Heckscher-Ohlin Model Assumptions – Production………………………………….…9

Heckscher-Ohlin Model Assumptions – Fixed Versus Variable Proportions………….12

Literature Review........................................ ………………………………………………….14

Case Study: Trinidad and Tobago

The Importance of Trade in Trinidad and Tobago……………………………………..16

Merchandise Trade…………………………………………………………..…………17
Recent Trends…………………………………………………………………..17
Exports………………………………………………………………………….18
Imports……………………………………………………………………….…23

Services Trade……………………….. ……..................................................................25

Recent Trends………………………………………………………….………..25
Travel Sector: Tourism, Education, Health……………………………………..25
Transportation Sector: Air and Maritime…………………………………….…27
Commercial Sector: Communication, Financial and Insurance services…….....28

Implications/Recommendations/Conclusion……………………………………………...….29

Bibliography………………………………….……………………………………………..….32

Appendices..................................................................................................................................33

3
 List of Illustrations
Figure Title Page

1 Merchandise Trade 1990-2004……………………………………..17

2 Sector Composition of Exports 1990-2003………………………...18

3 Services Exports by Area 1990-2003………………………………26

4 Travel and Tourism Exports (Cumulative Real Growth, %)…….…27

Table

1 Top 20 Exports to the World and CARICOM, 2001-2003………....19

Appendix

1 Trinidad and Tobago: Structure of the Energy Sector, 2003……..…33

2 Trinidad and Tobago: Sources and Uses of Energy Resources……...34

4
Introduction

The twin-island State of Trinidad and Tobago can be viewed as the economic giant of the
Caribbean. In the 1980s, Trinidad and Tobago was an upper-middle-income, oil-exporting
country that was highly dependent on the world price of oil for its economic growth. The nation
displayed the largest gross domestic product (GDP--see Glossary) of the Commonwealth
Caribbean, one of the highest per capita GDPs among the nations of the Western Hemisphere,
and one of the highest standards of living in the developing world. The country's GDP in 1985
stood at roughly US$7.7 billion at current prices, or about US$6,000 per capita.

The major sectors of the economy were petroleum and petrochemicals, construction, services,
and agriculture. Petroleum had fueled the economy since the early twentieth century and in 1985
still represented roughly 24 percent of GDP and 80 percent of exports. Oil reserves at the current
rate of extraction were expected to last approximately ten years, but the islands enjoyed large
reserves of natural gas. New petrochemical plants, utilizing the country's natural gas resources,
came on-stream in the early 1980s and included ammonia, urea, and methanol. These large
industrial projects were located at the newly built Point Lisas industrial park, which, along with
the park's new iron and steel plant, provided Trinidad and Tobago with an industrial base that
was unmatched throughout the Caribbean.

In the postwar era, the economy experienced two great boom decades, both of which were
followed by decades of slow or negative growth. Growth in import substitution manufacturing
and the economy as a whole waned in the late 1960s, exacerbating the social unrest at the end of
the decade. The quadrupling of oil prices in 1973 revived the economy and created a 9.6-percent
real annual growth rate from 1974 to 1979. Trinidadians and Tobagonians, nicknamed the
"Arabs of the Caribbean," were known throughout the region in the 1970s for the carnival of
consumption that they participated in with their instant oil wealth. The downturn in oil prices in
1982, however, plummeted the economy into a deep depression in 1983 from which the country
had not emerged by 1987. Negative growth peaked in 1984, when the economy contracted by
nearly 11 percent.

5
Trinidad and Tobago was a very open economy, dependent on the export of oil to purchase large
amounts of imported food, consumer goods, and capital goods. Oil represented approximately 80
percent of exports, whereas food accounted for as much as 20 percent of imports in the late
1980s. Unlike virtually every other Caribbean country, Trinidad and Tobago generally enjoyed
yearly trade and balance of payments surpluses. The country depended on the United States for
roughly 50 percent of its trade, but the islands also maintained important trade relations with the
European Economic Community (EEC) and the Caribbean Community and Common Market.
Once a donor nation that aided its poorer Caribbean neighbors, Trinidad and Tobago in the late
1980s was increasingly in need of external financing to weather its economic adjustment period.

Despite the recession of the 80s the country has been able to revive itself and improve its trade
performance. The energy sector continues to play a central in the economy. In 2003, it accounted
for nearly 40 percent of GDP, 83 percent of exports of goods, 41 percent of central government
revenues. Also, since the late 1970s, the energy production structure in Trinidad and Tobago has
shifted from primarily oil-based to natural and gas-based petrochemical production. Natural gas
production increased from 346 million cubic feet per day (mmcf/d) in 1975 to 2,594 mmcf/d in
2003. The expansion of the gas sector received a major boost in 1999, when the Atlantic
Liquefied Natural Gas Company (ALNG) began operations. Trinidad and Tobago has developed
its petrochemical and liquid natural gas (LNG) mainly for exports.

However, can Trinidad and Tobago’s export and import performance be related to the theory of
factor endowments? This theory essentially says a country should export its abundant resources
and import scare ones. Several papers have explored the relationship between country
specialization and factor endowment1. However existing tests of the framework find scant
evidence in favor of endowment-driven trade (e.g. Bowen et al 1987, Trefler 1995)

Therefore, this paper looks at the theory of factor endowments and attempts to examine its fit
with the major exports and imports of Trinidad and Tobago. Firstly, it describes the theory of
factor endowments and looks at example of the model itself. It then looks at the existing
literature regarding the theory of factor endowments and its relation to the exports and imports of
a country. The second part of the paper examines the major exports and imports of Trinidad and

1
For a survey, see Harrigan (2003).

6
Tobago2 and examines whether or not the theory of factor endowments fits with the flow of
exports and imports. The paper then identifies measures which would improve the level and
consistency of Trade in Trinidad and Tobago.

The Theory of Factor Endowments

The factor proportions model was originally developed by two Swedish economists, Eli
Heckscher and his student Bertil Ohlin in the 1920s. Many elaborations of the model were
provided by Paul Samuelson after the 1930s and thus sometimes the model is referred to as the
Heckscher-Ohlin-Samuelson (or HOS) model. In the 1950s and 60s some noteworthy extensions
to the model were made by Jaroslav Vanek and so occasionally the model is called the
Heckscher-Ohlin-Vanek model. All versions of the model can be simply called the “Heckscher-
Ohlin (or H-O) theory,” the Factor Endowment Theory, or simply the more generic “Factor
Proportions theory.”

The H-O model incorporates a number of realistic characteristics of production that are left out
of the simple Ricardian model. In the simple Ricardian model only one factor of production,
labor, is needed to produce goods and services. The productivity of labor is assumed to vary
across countries, which implies a difference in technology between nations. It was the difference
in technology that motivated advantageous international trade in the model.

The standard H-O model3 however, begins by expanding the number of factors of production
from one to two. The Model incorporates four main theorems: the Heckscher-Ohlin theorem, the
Stolper-Samuelson Theorem, the Rybczynski theorem, and the factor-price equalization theorem.
The Stolper-Samuelson and Rybczynski theorems describe relationships between variables in the
model while the H-O and factor-price equalization theorems present some of the key results of
the model. The Theory makes a number of assumptions these are described below:

2
Data presented would only be up to the year 2003, since actual data is only available up to this year. The
subsequent years are only estimates and as such assessments may not be necessarily accurate.
3
The “standard” H-O model refers to the case of two countries, two goods and two factors of production. The H-O
model has been extended to a many country, many goods and many factors case but in this paper, and by economists
in general, reference is made to the standard model.

7
Heckscher-Ohlin Model Assumptions – Market Structure

Perfect Competition prevails in all markets.

Two countries: The case of two countries is used to simplify the model analysis. For example, let
one country be Trinidad, the other China*. Note: anything related exclusively to China* will be
marked with an asterisk.

Two goods: Two goods are produced by both countries. A barter economy is assumed4. As such,
for trade to occur, goods must be traded for other goods. Thus at least two goods are needed in
the model. Let the two produced goods be steel and clothing.

Two factors: Two factors of production, labor and capital, are used to produce clothing and steel.
Both labor and capital are homogeneous. Thus there is only one type of labor and one type of
capital. The laborers and capital equipment in different industries are exactly the same. It is also
assumed that labor and capital are freely mobile across industries within the country but
immobile across countries. Free mobility makes the H-O model a long-run model (Suranovic
2006).

Factor Constraints: Additionally it is assumed that the total amount of labor and capital used in
production is limited to the endowment of the country. The Labor Constraint is,

Where and are the quantities of labor used in clothing and steel production, respectively. L
represents the labor endowment of the country. Full employment of labor implies the expression
would hold with equality. The Capital Constraint is,

Where and are the quantities of capital used in clothing and steel production, respectively.
K represents the capital endowment of the country. Full employment of capital implies the
expression would hold with equality.

4
This means that there is no money used to make transactions.

8
Endowments: The only difference between countries assumed in the model is differences in
endowments of capital and labor5. Thus in this case, Trinidad is capital-abundant relative to
China if:

Where K is the capital endowment, L the labor endowment in the Trinidad. K* is the capital
endowment, L* the labor endowment in China.

Therefore if Trinidad is capital-abundant then China is labor-abundant since the above

inequality can be rewritten to get:

This means that China has more labor per unit of capital for use in production than the Trinidad.

General Equilibrium: The H-O model is a general equilibrium model. The income earned by the
factors is used to purchase the two goods. The industries' revenue in turn is used to pay for the
factor services. The prices of outputs and factors in equilibrium are those which equalize supply
and demand in all markets simultaneously (Suranovic 2006).

Heckscher-Ohlin Model Assumptions - Production

The production functions below represent industry production not firm production. The industry
consists of many small firms in light of the assumption of perfect competition.

Production of Clothing

Trinidad China

5
A country is capital-abundant relative to another country if it has more capital endowment per labor endowment
than the other country.

9
where

QC = quantity of clothing produced in Trinidad measured in racks.

LC = amount of labor applied to clothing production in Trinidad measured in labor-hours.

KC = amount of capital applied to clothing production in Trinidad measured in capital-hours.

f( ) = the clothing production function which transforms labor and capital inputs into clothing
output.

and where all starred variables are defined in the same way but refer to the production process in
China.

Production of Steel

Trinidad China

Where

QS = quantity of steel produced in Trinidad measured in tons.

LS = amount of labor applied to steel production in Trinidad measured in labor-hours.

KS = amount of capital applied to steel production in Trinidad measured in capital-hours.

g( ) = the steel production function which transforms labor and capital inputs into steel output.

and where all starred variables are defined in the same way but refer to the production process in
China.

Production functions are assumed to be identical across countries within an industry. Thus both
Trinidad and China share the same production function f(.) for clothing and g(.) for steel. This
means that the countries share the same technologies. Neither country has a technological
advantage over the other. This is different from the Ricardian model which assumed that
technologies were different across countries.

A simple formulation of the production process is possible by defining the unit-factor

requirements.

Let,

10
 represent the unit-labor requirement in clothing production.

It is the number of labor-hours needed to produce a rack of clothing.

Let,

represent the unit-capital requirement in clothing production.

It is the number of capital-hours needed to produce a rack of clothing.

Similarly,

is the unit-labor requirement in steel production.

It is the number of labor-hours needed to produce a ton of steel.

And, is the unit-capital requirement in steel production. It is the number of

capital-hours needed to produce a ton of steel.

By taking the ratios of the unit-factor requirements in each industry a capital-labor (or labor-
capital) ratio can be defined. These ratios, one for each industry, represent the proportions in
which factors are used in the production process. They are also the basis for the model's name.

First, is the capital-labor ratio in clothing production. It is the proportion in which capital
and labor are used to produce clothing.

Similarly is the capital-labor ratio in steel production. It is the proportion in which capital
and labor are used to produce steel. It is said that steel production is capital-intensive relative to
clothing production if:

11
This means steel production requires more capital per labor-hour than is required in clothing
production. Clearly, if steel is capital-intensive, clothing must be labor-intensive. Clothing
production is labor-intensive relative to steel production if:

This means clothing production requires more labor per capital-hour than steel production

Heckscher-Ohlin Model Assumptions - Fixed versus Variable Proportions

Two different assumptions can be applied in a Heckscher-Ohlin model: fixed and variable
proportions. A fixed proportions assumption means that the capital-labor ratio in each production
process is fixed. A variable proportions assumption means that the capital-labor ratio can adjust
to changes in the wage rate for labor and rental rate for capital.

Fixed proportions is a more simplistic and also less realistic assumption. However, many of the
primary results of the H-O model can be demonstrated within the context of fixed proportions.
Thus the fixed proportions assumption is useful in deriving the fundamental theorems of the H-O
model. The variable proportions assumption6 is more realistic but makes solving the model
significantly more difficult analytically7

Fixed Factor Proportions

Fixed factor proportions means that aKC, aLC, aKS, and aLS are exogenous to the model and are

fixed. Since the capital-output and labor-output ratios are fixed, the capital-labor ratios, and

, are also fixed. Thus, clothing production must use capital to labor in a particular proportion

6
Under variable proportions the capital-labor ratio used in the production process is endogenous. The ratio will vary
with changes in the factor prices. Thus if there were a large increase in wage rates paid to labor, producers would
reduce their demand for labor and substitute relatively cheaper capital in the production process. This means aKC and
aLC are variable rather than fixed. So as the wage and rental rates change, the capital output ratio and the labor
output ratio are also going to change.
7
Steven M. Suranovic (2006) “International Trade Theory and Policy”

12
regardless of the quantity of clothing produced. The ratio of capital to labor used in steel
production is also fixed but is assumed different from the proportion used in clothing production.

Therefore, based on these assumptions, The Factor Endowment theory predicts the pattern of
trade between countries based on the characteristics of the countries. It says that a capital-
abundant country will export the capital-intensive good while the labor-abundant country will
export the labor-intensive good.

This is because, a capital-abundant country is one that is well endowed with capital relative to
the other country. This gives the country a propensity for producing the good which uses
relatively more capital in the production process, i.e., the capital-intensive good. As a result, if
these two countries were not trading initially, i.e., they were in autarky, the price of the capital-
intensive good in the capital-abundant country would be bid down (due to its extra supply)
relative to the price of the good in the other country. Similarly, in the labor-abundant country the
price of the labor-intensive good would be bid down relative to the price of that good in the
capital-abundant country.

Once trade is allowed, profit-seeking firms will move their products to the markets that
temporarily have the higher price. Thus the capital-abundant country will export the capital-
intensive good since the price will be temporarily higher in the other country. Likewise the labor-
abundant country will export the labor-intensive good. Trade flows will rise until the price of
both goods are equalized in the two markets.

The Factor endowment theory thus demonstrates that differences in resource endowments as
defined by national abundancies is one reason that international trade may occur

13
Literature Review
This review will look at some of the existing literature on the fit of theory of Factor endowments
with the trade performance of a coutry. Much of the traditional empirical studies on the location
of production are based on the Heckscher-Ohlin theory. This theory can be seen as a combination
of the Rybczynski theorem with the assumption of identical preferences.

 The Rybczynski theorem shows that as endowment of a given factor increases, the
country will increase production of the good that uses that factor intensively. For
example, suppose that China is relatively abundant in labour. An increase in labour
endowment will then have the effect of increasing the production of labour-intensive
goods such as textiles. Combining the results of the Rybcyznski theorem with identical
preferences across countries gives us the conclusion that countries will export goods
whose production are intensive in the factors that are relatively abundant in that
countries.

Traditionally, empirical work on the Heckscher-Ohlin theory has been carried out using trade
data. However, recently, there have been a number of papers that explored the implications of the
Heckscher-Ohlin model from the production side. Harrigan (1995) uses data from a group of
OECD countries to examine the importance of factor endowments to manufacturing. He finds
that endowments of capital are a source of comparative advantage for most industries while the
effects of endowments of skilled and unskilled labour on comparative advantage are ambiguous.
Part of the reason for the ambiguity of the results of skilled labour may be due to the fact that the
services sector is more skill-intensive than manufacturing. As a result, an increase in the
endowment of skilled labour will lead to larger services sector and relative contraction of
manufacturing. Harrigan (1997) expands on this result and shows that technological differences
are important in explaining the variation of output in a panel of OECD countries. Using a dataset
containing a mixture of both OECD and non-OECD countries, Harrigan and Zakrajsek (2001)
also find an important role for factor endowments in determining the location of production.

However, there is as yet limited consensus on the appropriate empirical proxy for measuring
resource abundance. Leamer (1984) argues that standard Heckscher-Ohlin trade theory dictates
that the appropriate measure is net exports of resources per worker. Though this measure has

14
been the basis for extensive research on the determinants of trade patterns (e.g., Trefler 1995,
Antweiler and Trefler 2002, Estevadeordal and Taylor 2002) to date there has been essentially no
empirical work testing its impact on growth.8 Also, the Heckscher-Ohlin framework is
essentially static in that the classical world is characterized by a fixed level of technology for
each country (though it may be differential across countries). Hence the theory does not deal
with the dynamics of the creation of comparative advantage and the question of how comparative
advantage may change over time (Özçelik and Taymaz 2002).

Additionally, facts casually and not so casually collected seem to be adding up a convincing case
against the HO model. The first was Leontief’s (1953) troubling discovery that U.S imports in
1947 were more capital intensive than U.S exports. For several decades this blow to the HO
model was thought to have knock-out power but Learner (1980) showed that it missed the mark
because of a misreading of the theory. Bowen, Leamer and Sveikauskus (1987) did not intend to
attack the HO model but, although doing the correct calculation, found what seems to be
disappointingly small association across countries between factors embodied in traded and factor
supplies. Another critique was provided by the Grubel and Lloyd (1975), who cataloged the
surprising amount of two-way trade in even finely disaggregated trade data. Furthermore, trade
among the industrial countries has apparently become more similar in their factor endowments9

Despite these criticisms, there is still some support of the theory. Recent research (Wood, 1994;
Aldaz-Carroll, 2002) shows that H-O theory has a lot of explanatory power if its domain is
restricted to broad product categories (rather than specific goods, for which scale economies are
often the main determinant of trade) and if capital – physical and financial – is excluded from the
list of production factors, because of its international mobility. Keesing (1966) calculated simple
correlations of US export performance with skill intensities. The largest positive correlations
occurred at the highest skill levels, while export performance was negatively correlated with the
unskilled labor share.

8
It is worth mentioning that the cited references show that the H-O model of factor endowments performs relatively
well for natural resources net exports, but it performs less well for manufactures.
9
Leamer (1995) “the Heckscher-Ohlin Model in Theory and Practice”

15
Case Study Trinidad and Tobago
Importance of Trade In Trinidad and Tobago
To begin our analysis, we outline the importance of trade to the twin island of Trinidad and
Tobago. In this dual economy, external trade plays a dominant role. One way of illustrating this
is by looking at the value of Trinidad and Tobago’s external transactions relative to its total
output, a measure referred to as trade openness. Trinidad and Tobago displays a high degree of
openness10

Another way of illustrating the importance of trade in the national economy is by looking at how
trade flows affect the country’s balance of payments. Trade surpluses recorded for the period
2001-2005 had an immediate and positive effect on the current account.11 This has also resulted
in considerable increases in the official reserves of the country. It is clearly evident therefore that
Trinidad and Tobago has maintained a healthy export performance so that exports exceed
imports consistently.

It is important to establish from the outset, that Trinidad and Tobago is endowed with vast
amounts of energy resources (See Appendix 1). As discussed below, the petroleum sector,
which emerged based on these resources, constitute a significant part of the country’s exports.
However, energy prices are very volatile in the world market and, as a result, a downward trend
in these prices affect the country’s main export commodities, oil and gas, and could easily wipe
out the existing trade surplus, pushing the current account into a deficit. Over the period 2001-
2005 however, oil prices have manifested an upward trend.11 In 2005, the external current
account strengthened to the equivalent of 18.5 percent of GDP, reflecting higher export volumes
and record prices for oil and petrochemicals.

10
Its Trade/GDP Ratio (exports plus imports of Goods and Services divided by GDP) is close to 100 percent one of
the highest in the Western Hemisphere. Calculation are based on IMF-DOTS and IMS, and World Bank-WDI
11
See Balance of Payments 2005 in Appendix

16
Merchandise Trade12

Recent Trends

Over the past decade, Trinidad and Tobago’s merchandise trade has been characterized by strong
growth and volatility. Between 1990 and 2004, exports grew by an average of 10.6 percent a
year, faster than the 7.2 percent growth in world trade. Export growth, while significant in
overall terms, fluctuated wildly over the period (from –18 percent in 1996 to +73 percent in
2003). Import growth averaged 10.9 percent a year, and fluctuated almost as strongly (from +62
percent in 1995 to –14 percent in 2000). Such volatility is mainly related to variations in
international fuel prices. Figure 1 illustrates the country’s vulnerability to such price shocks.
Figure 1: Merchandise Trade 1990 - 2004

Source: IDB Integration and Regional Programs Department using IMF-DOTS.Note: 2003–2004 are IMF estimates.

Trinidad and Tobago relies heavily on the United States as a destination for its merchandise
exports. Between 2000 and 2004, nearly 60 percent of its exports went to the U.S. As regards
other export destinations, there is a clear trend toward a growing concentration on regional
markets. Over the past decade, the country has more than doubled its exports to the Caribbean
Community (CARICOM), taking advantage of opportunities offered by preferential access to
that market. Since 2000, exports to CARICOM have averaged 19 percent of total exports, up
from 12 percent in 1990. Today, Trinidad and Tobago exports more than twice as much to
CARICOM as to the European Union (EU) and more than 10 times what it sends to Canada.

12
Despite recent growth in its services trade, Trinidad and Tobago differs from most other Caribbean Islands in that
goods still account for the bulk of its external trade (85 percent of total trade and an equal share of its exports) as
such, these would be discussed in great detail

17
Latin American countries absorb about 9 percent, while sales to the rest of the world have
declined in both absolute and relative terms. Import sources are more diversified, with about 31
percent from the U.S., 24 percent from Latin America, 21 percent from the EU, and 19 percent
from the rest of the world. CARICOM and Canada each supply less than 3 percent of Trinidad
and Tobago imports13

Exports

Product and Sector Composition

Despite recent attempts at export diversification, oil and gas account for about 60 percent of
Trinidad and Tobago’s total exports (average for the 2000–03 period) (Figure 2)14 Over the last
decade, that share has not declined appreciably; trends in international fuel prices, to a great
extent, have explained annual variations. Manufactured goods increased their share in total
exports from 30 percent in 1990–93 to 34 percent in 2000–03. Most of these exports are natural-
gas-based products (ammonia, methyl alcohol and urea). Sector diversification has remained
limited; in 2003, for example, only six products accounted for 66 percent of the value of total
manufactured exports. Food products, accounting for 5 percent of total exports, grew by only 2
percent in 2000–03. The share of agricultural raw materials and ores and metals in total exports
was negligible
Figure 2: Sector Composition of Exports 1990-2003

13
Source: IDB Integration and Regional Programs Department
14
Throughout the analysis period averages were mostly used since, in the context of strong year-to-year fluctuations
in fuel prices and thus export income, they represent trends more accurately than do single years.

18
Fuels dominate sales to all of Trinidad and Tobago’s major export destinations, accounting for
nearly 66 percent of exports to the U.S. and 50-60 percent of exports to CARICOM, Latin
America, and the EU.15 There are, however, notable variations in the sectoral composition of
exports to each of these markets. Food exports, for example, account for a larger share of exports
to CARICOM (17 percent) and the EU (8 percent) than to the U.S. (1 percent). Conversely,
manufactured goods account for a larger share of sales to the U.S. and EU (35 percent) than to
CARICOM (25 percent).

Of the more than 2,000 products Trinidad and Tobago exported during 2001–03, the top 20
Accounted for 84 percent of total exports (in value terms); 10 of them were fuel products (Table
1). Aside from the effects of fluctuating commodity prices, the share and composition of the top
20 in total exports has remained constant over the years. The share is somewhat lower (72
percent) in exports to CARICOM, where the top-20 list includes a number of food and
manufactured items that are not among the main products exported to the world

15
According to the Balance of Payments 2005 the energy sector comprising exploration and production, refining
and the production of petrochemicals, account for a significant 85.9% of merchandise export receipts and 42.9 and
46.1 % of GDP and government revenues respectively in that said year.

19
 Table 1: Top 20 Exports to the World and Caricom, 2001-2003

Source: IDB Integration and Regional Programs Department, Using UN-Commodity Trade Statistics Database

As a result of the large share of energy reserves, the island has attracted significant amounts of
foreign direct investment in the sector from multinational companies.16 The Petroleum Company
of Trinidad and Tobago Limited (PETROTRIN), a wholly state-owned integrated oil company,
is involved in a large range of petroleum-related activities17, Its refinery in Point-a-Pierre
processes 160,000 barrels of oil per day (bopd), sourcing additional crude from Venezuela,
Brazil and other suppliers. The company exports 85% of its refined products with the balance
being used up locally.18

On the matter of natural gas, Trinidad and Tobago has benefited significantly from these natural
mineral reserves, with benefits being passed on to the local companies and the export market. In
2005, natural gas production averaged 3,219 million cubic feet per day (mmcf/d). The LNG
industry accounted for 49.2 percent of total usage, followed by the ammonia industry (16.5
percent), the methanol industry (12.4 percent) and power generation (7.6 percent). The remainder

16
These include British Petroleum (BP), British Gas (BG), Repsol, Petro Canada and Atlantic LNG
17
Including: exploration, development and production; transportation from the oilfields to its refinery; purchase of
crude oil on the international markets; manufacturing; and services including third-party crude oil processing
18
Petro Connect Corporate News at a glance, Pg 52, December 21 st 2005.

20
was absorbed by the iron and steel industry and other small consumers. The United States market
claimed the largest share of LNG exports (89.6 percent), with a further 4.6 percent going to
Puerto Rico, 3.6 percent to Spain and 1.6 percent to the Dominican Republic. The market for
Trinidad and Tobago’s LNG exports expanded during the year to include Belgium which
received its first shipment of LNG from this country.

Existing data indicates that approximately 99 percent of natural gas liquids produced each year is
exported with the remaining 1 percent being utilized locally. Clearly, we see the factor
endowment theory holding true in the case of this twin island thus far, as evidence has shown
thus far that our major exports (fuels) are goods from existing resources that are abundant.19

As was noted previously, manufactured goods account for a growing share in the nation’s export
market. In the 1980s, the manufacturing sector was supposed to have contributed towards the
structural transformation of the country away from petroleum and sugar. Today however,
statistics reveal that the greater proportion of these exports are still linked to the petroleum sector
in the form of natural gas-based products namely, nitrogenous fertilizers, ammonia, methyl
alcohol and urea.

The industries which correspond to this list of activities will be considered as manufacturing
industries, and when taken all together, will be called the manufacturing sector. They are enlisted
as follows:

 Food, Beverages and Tobacco

 Textiles, Garments and Footwear
 Printing, Publishing etc
 Wood and Related Products
 Chemicals and Non-Metallic Materials
 Assembly type and Related Industries
 Miscellaneous Manufacturing

19
Appendix 2 shows this clearly

21
Returning to the theory which forms the basis of our study; the factor proportions theory states
that countries produce and export goods that require resources (factors) that are abundant.
Considering that the cost of any resource is simply the result of supply and demand, ceteris
paribus, then the factors in great supply relative to demand will be less costly than factors in
short supply relative to demand. This simple analysis forms the foundation for the rapid growth
of the manufacturing sector in the country.

The abundance of natural gas in the country has resulted in this energy resource being regarded
as relatively cheaper or less costly for manufacturers in this country as compared to
manufacturers in other Caribbean islands. Consequently, the number of manufacturing plants
seeking to take advantage of this reduced-input-cost advantage is great and is expected to
increase in years to come.20 The latest development in this area has been marked by
government’s initiative to allow the setting up of 2 Aluminum Smelter Plants (Alcoa and
Alutrin) in the southern part of the island, near the major energy resources. The process of
processing the chemical alumina into aluminum requires significant amounts of energy and so,
locating these plants where energy sources are abundant reduces cost and will in effect, increase
exports for the country.

In 2005, production and exports of methanol increased significantly, reflecting the coming-on-
stream of two of the largest methanol plants in the world. The first of these plants, Atlas
methanol facility came on stream in 2004 with the second, M5000 starting operations in 2005.
The addition of these two plants pushed domestic production up to a capacity of 6.4 million
tonnes per year, cementing our position as the number one exporter of methanol.

Ammonia production is also very considerable to the economy and to export performance, with
the operation of nine ammonia plants in the country. In the case of exports of nitrogenous
fertilizers and urea, these average 92 percent and 98 percent of production respectively. With
regards to the production of iron and steel products, exports over the period 2001-2005 constitute
an average of 60 percent of production, with the balance of production used in local
consumption.

20
See Table 4 for a list of existing gas-based plants for the year 2005.

22
In addition to the manufacture and export of chemicals and other natural gas-based products, the
production and export of beverages and tobacco play a major part in the attainment of trade
surpluses in the economy over extended periods in previous years. Exported products such as
juices and soft drinks manufactured by SM Jaleel and Co.; beers such as Carib and Stag
manufactured by Carib Brewery Ltd.; and alcoholic beverages (including the renowned
Angostura’s Bitters) made by Angostura Ltd. are just a few of the manufactured items that can
be seen on the shelves of stores outside of Trinidad and Tobago. Exports in this category of
manufacturing activity exceed import demand by approximately four times, thereby creating a
favourable trade balance in this area.21

The Sugar Industry could also be used as an example of the relationship between a country’s
exports and imports and its factor endowments. In the 70’s, an examination of the island would
prove that Trinidad had the potential to be one of the most economically viable of all West
Indian Islands. Its size, fertility and geographical location were all in its favour.22 Exports of
sugar to the United States, Europe and other external markets generated additional revenue to the
economy for years and thus served as a complement to the rich oil sector. For the year 2000,
exports reportedly brought in foreign exchange earnings equivalent of TT$243.6 million.
However, the decline of the sugar industry was eminent.23 Attributing to the demise of the sugar
industry were factors such as the high cost of operations, the erosion of protection in the
European Union (EU) which has resulted in reductions in preferential prices. Clearly Trinidad
and Tobago could not compete with countries whose factor endowments consisted of land and
Capital (machinery) as such could produce sugar much cheaper. And applying the factor
endowment theory here, we began to import sugar because the endowments necessary for low
cost manufacture, and supply was not available.

Imports
Trinidad and Tobago’s factor endowment would relate to the amount of resources that this
country possesses and can exploit. Our imports are based on the need for goods and services
which we cannot supply due to the lack of technology, machinery, and merely because of

21
One Possible reason for the success of this aspect of manufacturing activity is the availability sugar and
subsidized fuel prices to operate machinery.
22
Note: most Caribbean Islands including Trinidad and Tobago were given preferential treatment
23
The Annual Economic 2002 reported the sugar industry as being uncompetitive and unviable.

23
sociological factors which affect customers such as changes in individuals’ income and lifestyles
and subsequent changes in demand.

The United States accounts for significant percentage of imports to Trinidad and Tobago.
Existing data24 shows that 27.2% of total imports came from the US during the period January to
February 2006. 11.4% or TT$615 million came from Brazil, 8.6% or TT$464 million came from
Colombia and 6.8% or TT$367 million came from Gabon. But what exactly does this country
import?

According to the World Fact Book (2005), the major imports to Trinidad and Tobago include
machinery, transportation equipment, manufactured goods, food and live animals

It is important to note that motor vehicle imports and imports of oil and gas equipment have
contributed towards a major portion of Trinidad and Tobago’s import bill for the period 2003 to
2005. During this period the total import bill of automotive parts and service equipment
increased by 10 percent. Trinidad and Tobago also imports a significant amount of Crude Oil;
the Leontief Paradox may appear to have some weight here this is because, Trinidad and Tobago
is significantly endowed with mineral resources yet it imports crude oil, mineral fuel and
lubricants. Upon further investigation we see that Trinidad and Tobago is actually utilizes
imported crude oil along with domestic supplies in the production process so as to create refined
petroleum this is exported25

The petrochemical sector is the greatest contributor to Trinidad and Tobago’s Gross Domestic
Product. US investors have sought to capitalize on this area by exporting line pipe used for oil or
gas, drill pipe, casings and tubing for drilling, parts for gas turbines, pumps and parts for filling
station pumps. Machinery for liquefying air or other gases and filtering or purifying machinery
are also in great demand in Trinidad and Tobago.

The expansion of the Telecommunications Services of Trinidad and Tobago, together with the
additional six Internet providers, the already existing competition in the cable service provision,

24
The Central Statistical Office (CSO) Trade Bullent Vol. 12 No. 363
25
See Appendix 2

24
radio broadcasting and satellite services, has created the increase in the need for
telecommunications equipment. There are now two cellular operators in business in this country.
Imports to this sector were valued at US$16m in 2003 and more than doubled to US$38m in
2004. 2005 saw and increase to US$40.1m.

Businesses in Trinidad and Tobago have recognized the need to automate their operations hence
the increase in computer and peripheral purchases. Computers are also used by individuals in
their homes, in schools and in libraries. Many financial institutions have provided special loans
to facilitate such purchases. Computer and peripheral imports rose from US$47.7m to
US$51.1m during the period 2003 to 2005.

There is a major construction boom in Trinidad and Tobago. Residential homes, industrial
buildings, and new office buildings are being erected during this major thrust. Imports of
construction equipment have risen from US$36m to US$38.1m from 2003 to 2005.
The food import bill for Trinidad and Tobago is very significant. In 2003 for example, Trinidad
and Tobago’s total agricultural imports were $352m of which consumer oriented fish and
seafood products comprised roughly 57. Moreover, this country only supplies 30 percent of rice
domestically; the other 70 percent is imported.

Services Trade

In Trinidad and Tobago, unlike other Caribbean islands, services still account for a relatively
small share of total exports (12 percent) and GDP (7 percent).26 These shares have fluctuated
considerably over the years, with no apparent upward trend. Despite moderate growth in the past,
services constitute an important source of export revenue and jobs, with significant potential.27

Recent Trends
During the 1990–2003 periods, services exports grew at an average annual rate of 5.8 percent in
value terms, just below the world’s average rate of 6.5 percent.28 Over the period, annual growth

26
This estimate is based on data from the IDB Regional Programming Paper of CARICOM and the U.S. Trade
Representative’s Fourth Report on the CBI (for exports to the U.S)
27
Unfortunately, scarcity of reliable services data-resulting from a system deficient in data collection and
dissemination, severely limits the scope of analysis on services trade.
28
Derived from WTO databases

25
rates fluctuated significantly. The importance of certain sectors within the country’s services
portfolio has changed over time. From 1990–95 to 2000–03, the share of transportation earnings
in total services exports declined from 50 to 35 percent. The cause was not a drop in earnings,
but strong growth in travel services, which increased their participation in services exports from
24 to 37 percent. Over the period, commercial and government services maintained their
respective shares of approximately 25 and 4 percent (Figure 3).

Travel Sector: Tourism, Education, and Health

Figure 3 also shows, the importance of travel in total services exports is growing. In 1995–2003,
travel earnings increased by an average of 16 percent a year, compared to about 3 percent for
transportation and commercial and government services. Receipts from personal travel tripled,
reaching US$ 200 million in 2003; business travel grew at a slower rate. Over the period, 50
percent of all tourist arrivals were from the U.S. and Canada, 22 percent from the Caribbean, and
20 percent from Europe.

Figure 3: Services Exports by Area (1990-2003)

Such strong growth in travel receipts is partly a result of concerted efforts to develop the
country’s tourism industry. Additionally, in relation to factor endowments, as a tourism
destination, Trinidad and Tobago has much to offer. The small country boasts a wealth of natural
and cultural resources, with Trinidad serving as an internationally renowned centre for music and

26
dance, and Tobago offering some of the Caribbean’s most pristine beaches and some of the best
diving locations. More than 430 species of birds can be found on the two islands and Tobago is
home to the oldest protected rainforest in the Western Hemisphere. The island is also
internationally recognized for its drift dives- its seas are home to 300 species of South Atlantic
coral and a variety of multicolored fish.

In 2005, Travel and Tourism services and merchandise exports for Trinidad and Tobago totaled
approximately TT$9.7 billion, or US$1.5 billion (34 percent by visitors, 66 percent by exported
consumer and capital goods). The World Travel and Tourism Council (WTTC) reported that
over the past 15 years, the gains for Travel and Tourism Visitor Exports in Trinidad and Tobago
have been impressive. The report continues by acknowledging that over the total 16 year period,
(1988-2004), Trinidad and Tobago’s Visitor Exports have grown by 86 percent in real terms.
Over the next nine years, these exports are expected to grow by a strong 7.2 percent per annum,
Travel and Tourism Merchandise Exports (non-visitor exports) are also expected to show healthy
growth at 5.1 percent per annum. This can be shown in Figure 4 below.

Figure 4: Travel and Tourism Exports (Cumulative Real Growth, %)

Source: World Tourism Council 2004

Trinidad and Tobago’s travel sector also has growth potential in education and health-related
services. The St. Augustine campus of the University of the West Indies attracts many student
visitors to Trinidad. While earnings from student travel have been marginal in recent years, there
is potential to attract additional regional and extra-regional tertiary-level students. The health-

27
services industry also has growth potential, given the country’s proximity to North American
markets, favorable climate, educated work force, well-developed domestic health infrastructure,
and well-trained health practitioners (World Bank 2005).

Transportation Sector: Air and Maritime

Between 1990 and 2003, transportation services exports grew moderately, at 3 percent a year.
Passenger fares were the largest contributor to earnings, representing an average of 80 percent of
transportation and 33 percent of total services exports. A major player in the regional airline
market at the time was Trinidad and Tobago’s national carrier, British West Indian Airways
(BWIA).29 The maritime transport sector is also important, given Trinidad and Tobago’s large
export-oriented energy and chemical industries and its geographical location as a trans-shipment
point.

Commercial Sector: Communications, Financial, and Insurance Services

Trinidad and Tobago’s commercial-services export has proven vulnerable in recent years. A
healthy 12-percent annual growth rate in 1990–99 gave way to stagnant growth over the next
five-year period. This weak performance is primarily attributed to the communications sector,
particularly to adjustments in the accounting rate used for incoming telephone calls. Exports of
communications services increased by 10 percent a year, reaching US$ 110 million in the late
1990s; subsequently, they dropped significantly, now accounting for about US$ 35 million in
annual earnings.

The prospects for financial and insurance services are better. In Trinidad and Tobago, although
data on the country’s trade in financial services is not readily available, there are indications that
this sector is an important player in both domestic and regional markets. Insurance is an
increasingly important segment of the country’s services-sector portfolio. Among the services
sectors, exports of insurance services performed best, growing fivefold over the last decade. In
2000–03 alone, earnings from insurance services accounted for over half of all commercial-
services exports, growing by an average of 33 percent per year.

29
Note: This Airline went out of Operation in January 2007 and was replaced by Caribbean Airlines.

28
Implications, Conclusions and Recommendations

The concept of comparative advantage hinges on the endowments of factor inputs available in a
given country: labor, capital, and natural resources. Many countries and businesses have tried to
compete by undercutting each other’s labor costs or exploiting and creating vulnerable reliance
on commodities and natural endowments. In an increasingly global economy, factor inputs have
become less important as sources of productivity and sustained growth. Countries are no longer
constrained by their factor inheritance in creating competitive firms and environments; thus,
competitive advantage no longer rests on a country’s natural endowments but on its ability to
create a business environment, along with supporting institutions that allow the nation’s inputs to
be used and upgraded in the most productive manner (Porter 1990).

Trinidad and Tobago lacks successful firms that innovate, upgrade, and export complex products
by staying abreast of customers’ needs. Such competitive firms can charge premium prices for
their products, which they can then invest in workers’ skills. They can, in turn, pay workers
higher salaries, leading to a virtuous cycle of national prosperity. Like the energy industry itself,
Trinidad and Tobago’s manufacturers have used their comparative advantage to generate
income. But they have not built the types of products and brands that can lead to wealth in the
absence of comparative advantage.

One noteworthy example is Hydro Aluminum, a local smelter that produces alumina from
bauxite extracted from nearby Guyana. In this case, the comparative advantages are location and
cheap energy. Yet the smelter’s production is exported before any downstream products are
made. Many such products could be re-sold to locally operating energy companies, creating a
competitive advantage. Applying the factor endowment theory here, yes the country is exporting
its abundant resources but, it is not developing the resources so as to maximize returns.

Upgrading the competiveness of a nation’s export competitiveness requires a shared

understanding of competitiveness within the nation. Competitiveness is not simply a favorable
exchange rate, a positive trade balance, or low inflation. Rather, competitiveness is determined
by the productivity with which resources are deployed: human, capital, and physical assets. Since
competitiveness relies on the productive deployment of resources, industry sectors and their

29
firms, not nations, compete. More accurately, clusters of related and supporting firms constitute
the building blocks of a competitive economy (Fairbanks and Lindsay 1997).

Ironically, the scale of Trinidad and Tobago’s comparative advantage may have stunted
development of its potential competitive advantage. Trinidad and Tobago’s non-energy
manufacturers, which contribute seven percent of the country’s GDP,30 have succeeded in
exporting to their less efficient Caribbean neighbors. While the country’s per-capita income has
grown beyond that of its larger neighbors, its other cost advantages, including low energy prices
and import duties used to safeguard the manufacturing sector, have allowed Trinidad and Tobago
manufacturers to export basic goods at well below the cost of production. The national business
model is simple: import raw materials, manufacture low value-added goods far less expensively
than neighboring countries, and export those goods to substitute for equally low value-added
goods locally produced.

While depletion of oil or gas is not an imminent threat, it is understood that even the largest
reserves will eventually dry up. In fact, the interim sense of economic security derived from this
oil and gas windfall has created complacency at the expense of physical and social capital
depletion; in fact, Trinidad and Tobago has been decapitalizing the country by converting natural
resources to currency. Still more troublesome, fluctuating energy prices and substitutes make
Trinidad and Tobago’s much enjoyed stability largely dependent on external conditions.

Indeed, the nation’s increased dependence on energy resources through recently discovered
natural gas means that any price shock would be disastrous to the economy. It took the country
more than a decade to recover from the last shocks. At present projections, energy reserves will
be exhausted in 20 years. In this pressing context, it is in the nation’s best interest to act swiftly
to transform its economy by channeling oil and gas rents into sustainable endeavors that will
ultimately insulate the country against future swings of fortune.

Trinidad and Tobago’s biggest trade challenge is to maintain high export growth. Given that
most of the country’s exports are now based on its endowment of finite energy reserves, the only
way to achieve sustainable export growth into the future is through export diversification into

30
International Financial Statistics (IFS)

30
non-fuel activities. Diversification efforts should mainly target products and services that face
growing worldwide demand. This goes against Factor endowment theory which says to export
resources that are in abundant. However, Trinidad and Tobago’s abundant resources are finite
and as such, this country must seek to develop other sectors of the economy so as to insulate
itself from in changes in internal or external conditions.

Diversifying into products embedded with insight requires building superior industry structures
and product traits that cater to sophisticated customers. Superior industries are characterized by
low rivalry and high demand, while weak ones have the opposite traits. At the same time,
attractive products embody customer needs; they usually weigh less and are well branded and
they are attractive to price insensitive customers. Insight, brand, and focus are the building
blocks of world-class strategies Porter (1990)

In this context, Trinidad and Tobago has a long road ahead to fully achieve its competitive
advantages. Economic growth and prosperity have centered on natural-resource extraction.
Business development has focused on oil and gas extraction and exploitation of readily available
resources, without any effort to upgrade inputs or reach more sophisticated consumers. The few
industries that have developed outside the oil and gas sector remain largely entrenched in the
same pattern: reliance on low labor costs, production of commodity products, and dependence on
the lingering artificial advantages from an import-substitution model that the Government
followed years ago. In many cases, domestic producers assume that advantages in natural
resources and cheap labor will win them leading positions in export markets. However, today’s
successful nations create wealth by exporting products and services that embody insight into
customer needs, technologies and processes, distribution channels, and relative competitive
positions and not necessarily on abundant resources as put forth by the factor endowment
theory.

31
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Appendix 1: Trinidad and Tobago: Structure of the Energy Sector 2003

33
Appendix 2: Trinidad and Tobago: Sources and Uses of Energy Resources

34