Public Infrastructure Strategically Supplied by Governments and Trade in a Ricardian Economy
| Author | Nobuhito Suga,Makoto Tawada,Akihiko Yanase |
| DOI | http://doi.org/10.1177/00157325221119043 |
| Published date | 01 February 2023 |
| Date | 01 February 2023 |
| Subject Matter | Articles |
Public Infrastructure
Strategically Supplied
by Governments and
Trade in a Ricardian
Economy
Nobuhito Suga1, Makoto Tawada2 and Akihiko Yanase3
Abstract
In a simple two-country Ricardian economy with public infrastructures, we
consider a simultaneous and non-cooperate game between governments with
respect to public infrastructure supply. Then it is shown that a country with larger
(smaller) factor endowment exports a good whose production is more (less)
dependent on public infrastructures, and both countries will gain from trade as
long as factor endowment differs between countries. However, the following spe-
cial features appear. (i) Any incompletely specialising country produces two goods
at an inner point of the production possibility set. (ii) If factor endowment is the
same between countries, the trading equilibrium is attained by the pattern of
specialisation such that each country specialises in one good different from each
other and both countries become better off. Which country specialises in which
good is indeterminate. The result shows a typical case of symmetric breaking.
JEL codes: F11, H41
Keywords
Public infrastructure, Nash equilibrium, comparative advantage, Ricardian
economy
Article
Foreign Trade Review
58(1) 68–99, 2023
© 2022 Indian Institute of
Foreign Trade
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DOI: 10.1177/00157325221119043
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1 Faculty of Economics and Business, Hokkaido University, Sapporo, Japan.
2 Nagoya University, Nagoya, Japan.
3 Graduate School of Economics, Nagoya University, Nagoya, Japan.
Corresponding author:
Makoto Tawada, 2-82, Wakakusa-cho, Obu-shi, Aichi-ken 474-0022, Nagoya, Japan.
E-mail: mtawada2@dpc. agu.ac.jp
Suga et al. 69
Introduction
According to the penetration of recent surging globalisation into the world econ-
omy, many countries recognise the importance of public infrastructure as one of the
key elements to determine a country’s comparative advantage in trade. The rapid
and robust growth of the Chinese economy is gradually overwhelming the Asian
economic region and extending its influence on the world economy. Many trading
countries are aware of the impact of the public infrastructure supplied by China on
the existing trade patterns in world trade. They are forced to consider the strategic
supply of public infrastructure by considering the strategic behaviour of China.1
The One Belt and One Road Initiative advocated by the Chinese government is
regarded as a powerful and effective strategy for China to take a solid economic
and political leadership among Asian countries and over some regions of Africa
and Eastern Europe. There is no doubt that a drastic change in the patterns of trade
will be brought in the world economy by this Chinese strategic behaviour.2 In
order to deal with this foreseen change, the advanced countries, such as Japan, the
USA and Australia, became nervous and began to carry out various strategic eco-
nomic policies, including the public infrastructure supply to maintain the existing
benefits bearing from world trade.3
Taking this feature of the recent world trade into account, we propose a simple
general equilibrium model to investigate substantial properties concerning a
rather complicated real trading economy and show propositions of trade patterns
and gains from trade. The existing studies along the line of our study may be those
of Connolly (1970), Shimomura (2007), Yanase and Tawada (2019) and Yen
et al.(2019), for example, in the sense that the game-theoretic treatment is accom-
modated into the analysis. Connolly (1970), however, did not examine either the
topic of patterns of trade or gains from trade, while Shimomura (2007) and Yanase
and Tawada (2019) focused on public infrastructures of the unpaid factor type
defined by Meade (1952) where no external economies are generated substan-
tially. Yen et al. (2019) treated a similar topic to ours in a continuum of goods and
one-factor model, but they relied on a numerical simulation in an essential part of
the analysis so that their analysis lacks generality.
In the present study, we bring public infrastructures of the creation of atmos-
phere type defined by Meade (1952) into a simple Ricardian trading economy
where only one primary factor exists. Thus, the public infrastructures are sup-
posed to be law and education systems, research and development activities,
communication infrastructures, managerial skill formation and so on. Then we
examine the patterns of trade and gains from trade under the supposition that each
government takes the strategic behaviour for the public infrastructure supply to
compete with each other in the Cournot fashion.
Our analysis shows that multiple Nash trading equilibria may emerge but,
according to the pay-off dominance criterion proposed by Harsanyi and Selten
(1988), only one of them decisively remains as a trading equilibrium except for two
specific cases. Then we obtain the result that a country larger in the factor endow-
ment has a comparative advantage in the good more heavily dependent on public
infrastructure and exports that good because the country can supply a larger amount
70 Foreign Trade Review 58(1)
of the public infrastructure than the other country. Both countries will become better
off by trade. So, the results of the trade patterns and trade gains seem reasonable in
the light of Ricardian trade theory, by which we can confirm the robustness of a law
of international comparative advantage of Ricardian trade theory.
But we should notice that this result is not so easy to guess a priori, because,
in the strategic game setting, once a country with a smaller factor endowment
decides to supply a larger amount of public infrastructures in order to take an
advantage in a good more heavily dependent on public infrastructures, the best
strategic response of the other country is to take an advantage in the other good by
a smaller supply of public infrastructures. Then, the trade pattern is reversed and
this could be also a Nash. Our analysis proves that the latter case never occurs.
In our analysis, there are two interesting facts newly appear. One is that any incom-
pletely specialising country produces two goods in an inner point of the production
possibility set, implying the production is inefficient. We will argue this point in con-
nection to Suga and Tawada (2007), where, if the government supplies the public
infrastructure efficiently, an incompletely specialising country will lose by trade.
The other is the result derived in the case where the two countries are perfectly
identical with respect to all aspects, including the scale of factor endowment. In
this case, two asymmetric Nash equilibria appear and the pure strategic, non-
cooperative and normal game between governments leave these two trading equi-
libria equally possible, implying that the trading equilibrium is indeterminate. And
every country can enjoy a positive gain from trade no matter of which Nash equilib-
rium brings a trading equilibrium. This is a contrasting result to the traditional one
where, if two countries are the same with respect to every aspect, both countries stay
at the autarkic state even under free trade. Our result gives one example of the
symmetry-breaking equilibrium cases pointed out by Matsuyama (2002) and exam-
ined by Chatterjee (2017) in the framework of international trade.
Here we should refer to empirical studies for our analysis is purely theoretical.
The existing empirical studies investigating the pattern of trade based on public
infrastructure are very few. An exceptional study is Yeaple and Golub (2007), from
whose estimation results we cannot confirm a clear relationship between the pattern
of trade and the role of public infrastructure.4 The main obstacle for the advanced
empirical studies is the difficulty of getting detailed public infrastructural data
across countries, and a lack of clear and unified estimation results on the effect of
public infrastructure on each production sector. Another important and serious prob-
lem for the execution of the empirical studies relating to public infrastructure is that
the public infrastructures are usually supplied by the government or firms guided by
the government. Then, the public infrastructure supply can be made use of as a
political implement, which implies that we need to exclude the impact of the politi-
cal behaviour of the government in order to see the purely economic effect of the
public infrastructure supply to international trade. As a typical example, we can see
this point in the Chinese One Belt and One Road Strategy. Chinese foreign direct
investment for the construction of public infrastructures has not only an economic
purpose but also a political one. This mixing up of these two purposes makes the
various investments inefficient or seemingly oversupplied with respect to the risk
management and many serious troubles concerning the financial debts and property
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