Leontief Paradox

  More pictures from the Knossos Palace

Life in the
Knossos
Palace

Three positions of bull-leaping sports.

Bulls were worshiped by the
Phoenicians and Canaanites in
Palestine.

Water jars. Cretans carried water with

these jars to the ritual baths.

Life in the Knossos Palace, a restored

 mural.

Linear B
Linear B tablet (Omniglot) with
tablet
syllabaries, partly deciphered, similar
to hiragana). A precursor of the
alphabet.

  1. Leontief Paradox
Wassily Leontief received a
Nobel prize in 1973 for his
contribution to the input-output
analysis. Three of his students,
Paul Samuelson, Robert Solow
and Vernon Smith also received
Nobel prizes.
The Heckscher-Ohlin theory
states that each country exports
the commodity which intensively
uses its abundant factor. The HO
theory was generally accepted on
the basis of casual empiricism.
Moreover, there wasn't any
technique to test the HO theory
 until the input-output analysis was
invented.
The first serious attempt to test
the theory was made by Professor
Wassily W. Leontief in 1953.
          Result: Leontief reached a
paradoxical conclusion that the
US—the most capital abundant
country in the world by any
criterion—exported labor-
The first intensive commodities and
Empirical Test of imported capital- intensive
the HO theory commodities. This result has
come to be known as the Leontief
Paradox. [para = contrary to, doxa
= opinion]
Leontief took the profession by
surprise and his research
stimulated an enormous amount
of empirical and theoretical
research on the subject.
 How To perform the test, Leontief used
the 1947 input-output table of the
US economy (He received his
Nobel prize for his contribution to
input-output analysis later). He
aggregated industries into 50
sectors, but only 38 industries
produced commodities that enter
the international markets, and the
remaining 12 sectors were created
for accounting identities and
nontraded goods. He also
aggregated factors into two
categories, labor and capital. He
then estimated the capital and
labor requirements to produce:
          Capital and Labor
Requirements to produce one
million dollars' worth of the
typical exportable and importable
bundles in 1947.

Capital Labor
  Require Require
ment ment
aLx =
Expo aKx = 182.313
rts 2.550780 man-
years
aLm =
Impo aKm = 170.114
rts 3.091339 man-
years
 
 capital-labor kx = aKx/aLx = $14,300 (exports)
ratios km = aKm/aLm = $18,200 (imports)
The US seems to have been
endowed with more capital per
worker than any other country in
the world in 1947. Thus, the HO
theory predicts that the US
exports would have required more
  capital per worker than US
imports. However, Leontief was
surprised to discover that US
imports were 30% more capital-
intensive than US exports,
km = 1.30 kx.
 Criticism At first, Leontief was criticized on
 
statistical grounds.
Boris Swerling (1953)
complained that 1947 was not a
typical year: the postwar
disorganization of production
overseas was not corrected by that
time.
 Tokyo bombing (Operation
meetinghouse), March 10, 1945,
National Museum of Western Art
(国立西洋美術館), Tokyo
In 1956 Leontief repeated the test
for US imports and exports which
prevailed in 1951. In his second
study, Leontief aggregated
industries into 192 industries. He
found that US imports were still
Leontief's
more capital-intensive than US
Second Test
exports. US imports were 6%
more capital-intensive (km = 1.06
kx). (The transition of the US
economy from a wartime to a
peacetime economy was not
complete until the 1960s.)
Baldwin's Third More recently, Professor Robert
Test Baldwin (1971) used the 1962 US
trade data and found that US
imports were 27% more capital-
intensive than US exports. The
 paradox continued. [There were
some computational problems in
this study.]
km = 1.27 kx.
Afterwards, there were no new
empirical studies on US trade.
These studies should have been
made at lease one generation (20
years) had passed after the war.
   

   

  3. Trade Patterns of Other Countries

Tatemoto and Ichimura (1959) studied
Japan's trade pattern and discovered another
paradox. Japan was a labor-abundant country,
but exported capital-intensive goods and
imported labor- intensive
goods. Japan's overall trade pattern was
JAP inconsistent with HO. (Masahiro Tatemoto and
AN Shinich Ichimura)

Explanation: They said that Japan's place in

the world was somewhere between the
advanced economies and LDCs.
25% of Japan's exports went to advanced
 industrial countries. Japan's exports to
industrial countries were labor-intensive.
75% of exports went to LDCs. Japan's
exports to LDCs were capital-intensive.
Thus, the US-Japan trade was consistent with
HO prediction.
Japan- LDC trade was also consistent with the
HO theory.
While factories had been destroyed by the
incendiary bombing, the survivors were high-
skilled workers, who were needed to export the
capital-intensive goods.
Casualties: Japan = 3 million, US = 400,000,
Russia = 11 million military personnel + about
10 million civilians.
East
Ger
many

Remains of the Berlin Wall along Bernauer Strasse

Stolper and Roskamp (1961) applied
Leontief's method to the trade pattern of East
Germany. East Germany's exports were
capital-intensive.
About 3/4 of EG's trade was with the
communist bloc, and EG was capital abundant
relative to its trading partners. Thus, the EG
case was consistent with the HO theory.
Hong (1975) analyzed Korea's trade pattern
South
(1966-72), which was consistent with the HO
Korea
theory.
 CAN  Wahl (1961) studied Canada's trade pattern.
 Canadian exports were capital-intensive. Most
ADA of Canadian trade was with the US. The result
was inconsistent with HO.
 INDI
A

The flower market in Kolkatta, India

 Bharawaj (1962) studied India's trade pattern.

India's exports were labor-
intensive. Consistent with HO theory .
However, Indian trade with the US was not.
Indian exports to the US were capital-
 intensive.
 

Explanatio
ns for the 1. Leontief: US was more efficient
LP
 Leontief:
US had
absolute
advantages

(Schwerer) Gustav railway gun was deployed during the Battle of

Sevastopol.

 Leontief himself suggested an explanation

for his own paradox. He argued that US
workers may be more efficient than foreign
workers. Perhaps U.S. workers were three
times as effective as foreign workers. Note
that this increased effectiveness of the
 American workers was not due to a higher
capital-labor ratio, because we assume that
countries have identical technologies and
hence identical capital-labor ratios.
          It means that the average American
worker was three times as effective as he
would be in the foreign country. Given the
same K/L ratio, Leontief attributed the
superior efficiency of American labor to
superior economic
organization and economic incentives in
the U.S. However, Leontief found very few
believers among economists.
 Kreinin (1965) conducted a survey of
engineers and managers, and tried to test
whether an average American worker is three
times as effective as a foreign worker.
A realistic difference in effectiveness
between the representative workers in the
U.S. and those in the foreign countries were
 Empirical about 20-25%. Obviously, this difference
evidence does not explain the Leontief Paradox.

          When comparing the trade patterns of

a market economy and a command economy,
this explanation may be important. Modern
technology is available to Russians, but
production in the former Soviet Union is still
inefficient due to lack of incentives.
 There might have been some difference in
labor efficiency or productivity between the
US and the rest of world in 1947. But this
should have been relatively insiginficant.
This was probably a bad theory.
 Evaluatio In reality, Leontief's argument amounts to
n assuming different production technologies.
He calculated how much capital and labor
inputs were needed if the imports had been
produced in the US, insteading of calculating
how much inputs were actually used in the
source countries.
 Trefler (1993) resurrects Leontief's theory
and has proved that when quality indices of
factors are incorporated, US exported capital
  and imported labor services in 1947 (HOV
Theorem). This still does not prove,
however, that US exports had been more
capital intensive than its imports that year.
   

     

  2. Factor Intensity Reversal

 Example

Chinese soldiers marching on the Burma Road toward the fighting

lines on the Salween River front (Frank Cancellare, 1943)

If a commodity is produced by a labor-

intensive process in the labor-rich country
and also by the capital-intensive process in
the capital-rich country, then factor intensities
are reversed in the production of that
commodity.
          Example: Agriculture is labor-
 intensive in India but capital-intensive in the
US.
If the US imports agricultural products, then
an LP occurs in the US, because a capital-
abundant country is importing the capital-
intensive product.
If the US exports agricultural products, then
an LP occurs in India, because a labor-
abundant country, India, is importing the
labor-intensive good.
In the presence of a FIR, an LP always occurs
 LP is in one of the countries. Thus, Jones (1956)
inevitable and Robinson (1956) argued that FIR could
have been responsible for the LP in the US.
 The question is whether FIR is common in
the real world. Minhas (1963) investigated
24 industries for which comparable data were
available for 19 countries. He found FIRs
only in 5 countries.
 Empirical
relevance           Leontief (1964) reviewed Minhas's
book and pointed out that only 17 out of 210
possible reversals did occur for the relevant
range of factor prices. Moroney (1967)
concluded that FIR has much less empirical
importance, albeit theoretically interesting.
 Agricultur Remark: FIR plays an important role only if
e the trade volume of the industries with
 reversed factor intensities is large.
While there has not been much empirical
evidence about the possibility of factor
intensity reversals, FIR is real. It may be
important when comparing trade patterns
between developing and developed
economies (e.g. China vs. US).
In most developed economies agriculture's
share of GDP is less than 1%.(UK = .7%, US
= 1.2%, world = 6.1%). US trade surplus in
agriculture was about $20 billion in 2014
(about 1/10 of 1% of US GDP.) Thus, FIR is
not important empirically, and is not likely to
have been responsible for the LP in 1947.
   
 
 
  3. Natural Resources
           Leontief may have oversimplified the
production functions and failed to recognize
the endowments of natural resources. With
  three factors of production, the HO model
does not predict much. This is because the
notion of abundance is well-defined, but factor
intensity cannot easily be defined.
 "Factor
intensities
" are
difficult
to define
in higher
dimensio
ns.
(a topic
for
graduate
copper mine in Arizona
students)
 It is possible to have K1/L1 > K2/L2 and
K1/N1 < K2/N2.
We cannot make a statement "A labor-
abundant country will export the labor-
intensive product" in a three-good, three-factor
world (because labor-intensity is not defined).
Jaroslav   Suppose the US is poor in natural resources.
Vanek's Assume that the import-competing industry
Argument uses capital and natural resources in fixed
(1963) proportions, i.e., K and L are perfect
 complements in production. Then apply the
HO theory. The US imports natural resource-
intensive products, but it appears that the US
is importing the capital- intensive goods.
 Empirical studies have shown that the natural
resource content in typical US imports is
 Evaluatio greater than that in US exports. But it is
n difficult to believe that US is poor in natural
resources. Vanek's explanation is not
empirically convincing.
In a world of many factors (K, L, N, .... Z),
 Factor factor abundance can be ranked:
Abundanc
K/K* > N/N*> ...> L/L*.
e is
meaningf In this case, we can say that the HC is (most)
ul abundant in capital, and least abundant in
labor.
 Hecksch  When there are more goods than factors (n >
er-Ohlin- 2), the pattern of trade is not predictable.
Vanek
Theorem The focus is then on indirect factor trade. A
country exports its abundant factors through
trade in goods.

Let  = Y/(Y + Y*) be the home country's

share of world income. Then the HC is
abundant in capital, if

K/(K + K*) > Y/(Y + Y*) ≡ .

 For instance, India's GDP is about $2 trillion
and its share of gross world product ($70
trillion) is 1/35. India's population share is 1/7,
which is greater than 1/35. Thus, India is
abundant in labor, and HOV Theorem predicts
that India will export labor services to the Rest
of the World.
The HOV Theorem states that if trade is
balanced, a country exports (the services of)
its abundant factors through trade in goods.
China's labor share = 1.4 billion/7 billion = 0.2
China's income share = 1/7 (about 14%).
0.2 > 1/7. (China is abundant in labor).
China will export labor services through
international trade.
The purpose of trade is to export the abundant
factors.
Remark 1. If factor prices are equalized, the definition
of factor abundance makes sense, since
income is the sum of factor incomes.
Y = wL + rK + sN + ...
 
In a world of two factors, if factor prices are
equalized (w = w* and r = r*)
 K/K* > Y/Y* if and only if K/K* > L/L*.
Thus, one can say that the above is a more
general definition of factor abundance. (If a
country's labor share is greater than income
share, it is abundant in labor.)
2. Trade theory is supposed to predict the
patterns of output trade. As the number of
outputs increases, it becomes exceedingly
difficult to predict the patterns of output trade.
Thus, HOV was not even a result that
economists were looking for.
3. Nevertheless, HOV theorem predicts
the indirect trade of factors through output
trade. If HOV prediction is not materialized in
the real world, it is an indication that there is a
serious distortion in the economy. In this
sense, HOV Theorem does provide a guide to
trade policy; a trade policy should not
encourage exports of scarce resources and
imports of abundant resources.
   
 

  4. Tariffs and Transport Costs

   William Travis (1964) argued that tariff may have
been responsible for the LP. However, tariffs tend to
 reduce trade volume, but not reverse the commodity
trade pattern. In other words, an import tariff cannot
induce a country to export goods that intensively use
its scarce factor. It would only reduce the volume of
goods which it would export in the absence of a tariff.
 Baldwin (1971) showed that this indeed was the case.
Without tariffs, the capital-labor ratio of imports
would have fallen by 5%, which is not sufficient to
resolve the LP.

 Rem  Tariffs and transport costs both tend to reduce the

ark volume of trade, but not reverse the pattern of trade.
 No reversal of trade

Instead of importing petroleum from the Middle East,

the US now exports natural gas and oil to other
countries. This trade reversal is not caused by an
increase in tariff but by the discovery of abundant
shale oil and fracking technology.
   
 
  5. Demand Bias
A capital-abundant country need not export the
capital-intensive good if her tastes are strongly
biased toward the capital-intensive goods. Thus,
  the LP can be explained if the US had a strong
consumption bias toward the capital-intensive
goods.
Stefan Valavanis-Vail (1954)
Nihon
bashi
fish
market
, now  
Tsukiji
market
)
 Tsukiji fish market

A blue fin tuna was sold for a record $3 million in

Jan 2017. (about 500 pounds, $5000 per pound).
Nihonbashi (Japan bridge) fish market is the
predecessor of today's Tsukiji fish market with
over 60,000 employees. Its annual sales exceeds
$40 billion.
US spends 6.5% on food, Japan 13.5%, China
25.5%. The relative price of food tends to be
higher in developing countries.
 Exam
ple of
deman
d bias

cacao beans
In 1819 Francois-Louis Cailler established one of
the first chocolate factories in Switzerland. Cailler
Swiss Chocolate is the oldest brand of Swiss
chocolate still in existence, and Switzerland leads
the world in per capita annual chocolate
consumption, 22.5 pounds per person! (Swiss
Chocholate). Per capita consumption of
chocolates is less than 5 pounds in the United
States.

Sushi rolls

Per capita consumption of seafood in Japan is 60

 kgs per year while that of the US was about 15
pounds in 2001. Thus, the Japanese people
consumes 9 times more seafood than Americans
per person.
However, when commodities are broadly
classified (e.g., housing, foods, transportation,
etc.), consumer tastes are the same across trading
countries.
 Jones (1956, University of Rochester) argued that
demand bias could be an explanation. However,
 Jones
no one argued that demand bias was a cause of the
LP.
Empiri (1) Houtthakker's studies (1957, 1960, 1963)
cal suggest that there is considerable similarity in
studies demand functions among countries.
on
Deman (2) As per capita income increases, consumption
d Bias of the labor-intensive goods (such as services)
tends to increase while that of the capital-
intensive goods decreases. (That is, the labor
intensive goods are luxury goods. Consumers
develop a sweet tooth for labor-intensive goods as
income increases.) If there had been a
consumption bias in the US in 1947, the bias must
have been toward increased consumption of the
labor-intensive goods. Therefore, consumption
bias would have reinforced the HO prediction that
US would import the labor-intensive goods.
 Thus, demand bias is NOT a good explanation for
the LP.
As GDP increases, the share of services increases.
The share of services was only 60% in 1960, but
  has since steadily increased to 80% in 2019 (ag =
1.1%, manufacturing = 20%). Services tend to be
nontraded goods.
   
 
 
  6. Human Capital
Human capital has not been taken into account
in evaluating LP. The idea is simple. Human
capital is created by education. Education, like
investment in physical capital, requires time and
  uses up resources.
Leontief did not include the value of human
capital in his calculations. But he argued that US
exports were skilled labor- intensive than US
imports.
3 × 3? (i) there are two ways to incorporate human
capital. Labor may be divided into to two or
more groups: unskilled labor, semi-skilled labor,
and skilled labor. First, the US may have been
abundant in skilled labor. The US may have
been exporting skilled labor-intensive goods.
(However, in a 3 × 3 HO model, we cannot
predict that a labor abundant country will export
the labor intensive good, because which good is
"labor-intensive" or "capital-intensive" is not
clearly defined in a higher-dimensional world.)
(ii) A second way to include human capital: add
human capital to physical capital:
K = Ko + Kh
How
to
estim
ate
huma
n
capita
l

Ice breaking tanker "Magellan," Arkhangelsk region, Russia

No reliable estimates of capital stock. Capital

inputs are not homogenous across industries.
Total value of US capital stock is about $51
trillion in 2014. The capital-output ratio is about
2.5 in the US.
(i) Kravis (1956) found that American workers
in the export industries earned higher wages
 than those in the import competing industries.
This difference in wage reflects the existence of
human capital.
It is more likely that human capital had existed
in both industries. However, it is the extra
human capital embodied in labor in the export
sector that counts here. The value of (extra)
human capital embodied in labor is:
(wx - wm)/r = Kh.
 

High school dropouts: $20,000

High school graduates: $30,000
Bachelor's degree: $59,000
Master's degree: $70,000
Professional degree: $90,000 (+ increased job
security + low unemployment rate, 1.5%)
Doctor's degree: $84,000 (lower).
The premium is a payment toward the extra
amount of human capital or skill.
  (ii) Kenen (1965) used 9% discount rate and
showed that if the value of human capital were
included, the US exports were capital- intensive
relative to US imports. This would reverse the
 LP.
However, estimates of human capital is sensitive
to the interest rate chosen. Specifically, a lower
interest results in a greater amount of human
capital in the export sector. If the discount rate is
over 12%, this theory does not explain the LP.
The wage gap between the two sectors may be
due to other factors. Attributing the wage gap to
only human capital is unsatisfactory. (Who stole
the cookies from the cookie jar?)
(iii) Baldwin's (1971) analysis shows that
Human capital alleviates the LP, but it does not
resolve the paradox.
  These analyses show that presence of human
capital can play an important role in determining
 Evalu
trade patterns between coutries. However,
ation
available empirical evidence is not very
conclusive either way.
   
 

  7. Trade Imbalance
  The HO theory based on the assumption
that trade is balanced. To predict the trade
pattern when trade is not balanced, much
more information is necessary. In general,
when trade is not balanced, a capital-
 abundant country may not export the
capital-intensive goods. With a trade
surplus, a capital-abundant country such
as the US may not only export the capital-
intensive goods but also the labor-
intensive goods.
Leontief's data show that US exports in
1947 amounted to $16,678 million and
imports were $6,177 million. GNP of the
US that year was $198,688 million. Thus,
the trade surplus was more than 5% of
national income.
   Suppose that there are three goods, 1, 2,
and 3, so that k1 > k2 > k3.
Assume further that when trade is
balanced, the US exports good 1 and
imports 2 and 3. Then this trade pattern
would be consistent with the HO theory.
Suppose now that the US is maintaining a
large trade surplus. This trade surplus
means that US consumers must reduce
consumption of all three goods
proportionately (due to homothetic
preferences). In the presence of a large
trade surplus, it is possible for the US to
export the most labor-intensive good.
That is, the US may export 1 and 3 and
 import 2.
In this case, the average capital-labor ratio
of the exports (1 and 3) can be lower than
that in imports and a Leontief paradox
occurs.
 
E
In Pr Con
x
du k od sum
p
str i uct ptio
o
ies ion n
rt

 Scenari 2
40
o B: 1 2 200 0
0
Balance 0
d Trade -
1
2 1 50 200
5
0
0 -
15
3 . 200 5
0
5 0
Scenario  
S: Trade In k Pr Co E
Surplus du
i od nsu x
str uct mpt p
 o
ies ion ion
rt
3
40
1 2 100 0
0
0
-
2 1 50 100 5
0
0
15 5
3 . 100
0 0
5
If trade is not balanced, the HO theory
cannot predict the trade pattern.

Trade kx = (300 K1 + 50K3)/(300 L1 + 50L3) > or

pattern < 1 = km = k2
when A capital-abundant country with a trade
trade is surplus may export even the most labor-
not intensive product (US in 1947).
balanced
A labor-abundant country with a trade
surplus may export even the most capital-
intensive product (China today)
 Questio  Had trade been balanced in 1947, would
n the US have exported capital-intensive
goods and imported labor-intensive
goods?
           Among the 38 industries examined
by Leontief, only three industries were
importers in 1947. In the remaining 35
industries, the US was an exporter. Casas
and Choi (1984) computed the trade
pattern that would have prevailed had
trade been balanced in 1947. They
concluded that the US would have
exported capital-intensive goods in the
balanced trade situation. That is, US
exports would have been more capital-
intensive than US imports.
kx = $12,338 per man year
km = $11,231 per man year
 Referen Bharawaj, R., "Factor Proportions and the
ces Structure of India-U.S. Trade," Indian
Economic Journal, October 1962.
Casas, François and E. Kwan Choi,
"Trade Imbalance and the Leontief
Paradox," Manchester School 52 (1984).
Casas, François and E. Kwan Choi,"The
Leontief Paradox: Continued or
Resolved?" Journal of Political
Economy 93 (1985)
Wahl, D. F., "Capital and Labor
Requirements for Canada's Foreign
Trade," Canadian Journal of Economics
and Political Science, August 1961.
 Leontief, Wassily “Domestic Production
and Foreign Trade; The American Capital
Position Re-examined” Proceedings of
the American Philosophical Society, 97
(1953), 332-349.
Stolper, Wolfgang F. and Karl Roskamp,
"Input-Output Table for East Germany,
with Applications to Foreign
Trade." Bulletin of the Oxford Institute of
Statistics, November 1961.
Trefler, Daniel, "International Factor
Price Differences: Leontief Was Right!,"
Journal of Political Economy 101 (1993),
961-87.
William. P. Travis, The Theory of Trade
and Protection, Cambridge: Harvard
University Press, 1964.
Robert E. Baldwin, Determinants of the
Commodity Structure of U.S. Trade,
American Economic Review 61, no. 1
March 1971
Stefan Valavanis "Vail, Leontief's Scarce
Factor Paradox," Journal of Political
Economy, Vol. 62,Dec. 1954
 

 
What's Next? Fragmentation of
Industries
The More than half the countries tested show
world trade patterns inconsistent with the HO
changed theory.
after
WWII: In such cases, there must be some problems
that offset the HO trade patterns. The HO
Fragmen theory generally explains the trade patterns
tation during the post war periods, say 1970 - 2000
and for trade in.

There has not been a new study

for the trade patterns after 1980.
The HO theory applies today to
international trade in bulky goods
(foodstuff, forestry products, etc.)
and resource extracting industries
(various mining industries)
(i) Industries with interchangeable
parts (Ricardian model).
World trade patterns have become a lot more
complex: Fragmentation. (e.g., iPhones
contain Chinese components. Japanese cars +
Korean tires, etc.) Parts can easily be
replaced.

8 percent of all purchases are

returned ($280 billion in 2016).
Automobiles and electronic goods
(e.g., smartphones, iPad)
15 - 20 percent of online
purchases are returned. Parts may
be replaced and repaired goods
may be resold at discounted
prices.

A smartphone contains electronic

components like resistors,
transistors, capacitors, inductors
and diodes connected by
conductive wires. (Arturo Verea,
Shutterstock)
Michael Boskin reportedly said in
1992, claiming that it wasn't
important whether an economy
produced computer chips or
potato chips. However, chip
technology has a high potential to
create new high-tech jobs, and
hence is a progressive industry,
whereas the potato chip industry
has attained its evolutioary
maximum, and is likely to be a
stagnant industry.
Parts are produced in different
countries according to their
comparative advantages, and
assembled in a low-wage
country. US manufacturing firms
 outsource the fragmented processes to low
wage countries.
  (ii) Trade in integrated industries
(e.g., shipbuilding, aircrafts)
where fragmentation is not
allowed. A defective part (e.g., O-
ring) deables the whole product.
Welding jobs cannot be redone.
(economic lifespan of an oil
tanker = 25 years)
Integrated industries export high-
tech products. (Identical
technology assumption must be
relaxed) ⇒ back to the Ricardian
model. Advanced countries do not
share technologies. French
royalties: $10 million per tanker.
(5% for French design)
Russian Icebreaker
Ice-breaking tankers cannot be
easily repaired. Parts cannot be
easily repaired en route. e.g.,
Gladstone LNG taker was
disabled. It is costly for tugboats
to drag a tanker to the original
shipyard. Often the disable boats
are junked.
Parts cannot be outsourced. Thus,
the traditioal HO model applies,
but the assumption of identical
technologies must be relaxed.
(trade under differentiated
oligopoly). Shipowners choose
quality over low price.
The New Supertanker Plague
Erika was built in Japan in 1975 is
a typical older tank, nearing the
end of its life, set sail from
Dunkirk, France, carrying 10
million gallons of fuel oil. It was
split in half. (Reason: excessive
rust)
Similarly, MOL Comfort was
completed in 2012, but broke into
two off the coast of Yemen in
June 2013.
 The industry continues to develop
corrosion preventive technology
using polymer coatings.