The variety of goods imported to the U.S. has dramatically increased in the past two decades. This growth reflects a widening circle of nations delivering the same goods to this country. In some cases, the U.S. makes its own version of these products--such as Hershey's chocolate, which is consumed within the U.S. and exported. At the same time, a growing number of competing brands originating from numerous other countries are sold here. ; Such increasing variety of trade has been characteristic of many goods. Analyzing this type of commercial activity helps explain how countries and firms gain a competitive advantage, how they organize their production internationally and how quickly they can expand into new product lines.International trade ; Imports ; Consumer behavior ; Productivity

Shalah M. Mostashari

English

Research Papers in Economics

Insights from the 
Federal reserve Bank oF dallas
EconomicLetter
vol. 5,  no. 15
deCeMBer 2010   
As more firms take 
 advantage of the cost   
savings of an increasingly 
international division of 
labor, continued growth 
in the variety of imports 
coming from developing 
nations can be expected. 
T
he  variety  of  goods  imported  to  the  U.S.  has  dramatically 
increased in the past two decades. This growth reflects a widen-
ing circle of nations delivering the same goods to this country. In some 
cases, the U.S. makes its own version of these products—such as Hershey’s 
chocolate, which is consumed within the U.S. and exported. At the same 
time, a growing number of competing brands originating from numerous 
other countries are sold here.
Such increasing variety of trade has been characteristic of many goods. 
Analyzing this type of commercial activity helps explain how countries and 
firms gain a competitive advantage, how they organize their production 
internationally and how quickly they can expand into new product lines. 
Documenting Variety 
It’s important to distinguish between a “good” and a “variety.” In this 
article, a good is considered a product as defined at the most-detailed 
level used to track U.S. imports.1 A variety is a good that originates from 
a  particular  country.  Thus,  French  red  wine  is  a  variety  different  from 
Chilean red wine, even though they may have the same “good’’ classifica-
tion. This approach assumes that goods are differentiated by country of 
origin.2 Admittedly, this definition may not accurately reflect the complete 
number of imported varieties. For example, within the category of French 
red wine, there may be a number of imported types with varying charac-
teristics and prices. 
The number of varieties imported by the U.S. increased 33 percent 
between 1989 and 2007 and 23 percent between 1989 and 2009. Decreases 
in 2008 and 2009, when import varieties tumbled back to 2001 levels, 
largely  reflect  the  world  trade  collapse  during  the  financial  crisis  that 
Expanding Variety of Goods Underscores 
Battle for Competitive Advantage
by Shalah M. Mostashari	 EconomicLetter	 Federal reserve Bank oF dallas 2 	 Federal reserve Bank oF dallas  EconomicLetter
 
began in August 2007. Nevertheless, the 
trend over most of the 20-year span is 
positive.
Growth in varieties can result from 
importing a broader range of goods or 
importing the same good from more 
countries. Of the 8,870 total possible 
goods, the U.S. imported 8,414 goods 
in 2009. Over the past 20 years, the 
number of goods the U.S. imported 
ranged from a maximum of 8,503 in 
1989 to a minimum of 8,383 in 1992, 
reflecting little variation in the number 
of imported goods across time relative 
to the growth in variety (Chart 1).
On the other hand, the average 
good was exported by about 12 coun-
tries in 1989, compared with about 
16 in 2007. The substantial increases 
in import variety are primarily driven 
by more countries exporting the same 
goods the U.S. already imported. 
Rationalizing Trade
Trade patterns suggest that 
resources and technological knowledge 
are particularly helpful in explaining 
which countries can competitively pro-
duce certain goods. However, consum-
er preferences for variety and choice 
also play a role in the large number 
of differentiated products bought and 
sold. These findings are consistent with 
two widely held theories of trade.
Trade explained by comparative 
advantage, or “old trade theory,’’ sug-
gests that countries exchange goods 
when they have fundamentally dis-
similar attributes. Differences between 
countries could be derived from 
variations in productivities or in the 
resources they possess to manufacture 
goods. For example, the U.S., being 
relatively abundant in capital and 
skilled labor, is expected to export 
goods to China that rely heavily on 
these inputs. China is expected to 
export to the U.S. goods belonging 
to industries such as textiles, whose 
production is relatively labor intensive, 
standardized and does not require 
workers to be formally educated or 
trained. In extreme cases, when coun-
tries are very different, their exports 
Chart 1
Varieties of U.S. Imports Rise Even as Number of 
 Goods Remains Stable
Number of varieties (thousands)                                                                                                                  Number of goods
Varieties
Goods
100
110
120
130
140
150
’09 ’08 ’07 ’06 ’05 ’04 ’03 ’02 ’01 ’00 ’99 ’98 ’97 ’96 ’95 ’94 ’93 ’92 ’91 ’90 ’89
8,350
8,400
8,450
8,500
8,550
SOURCES: Author’s calculations using data from the U.S. International Trade Commission and “Concording U.S. 
Harmonized System Categories Over Time,” by Justin Pierce and Peter Schott, National Bureau of Economic Research, 
Working Paper no. 14837, April 2009.
The substantial increases 
 in import variety are 
 primarily driven by more 
countries exporting the 
 same goods the U.S. 
 already imported.	 EconomicLetter	 Federal reserve Bank oF dallas 	 Federal reserve Bank oF dallas  EconomicLetter 3
are specialized in unique subsets of 
goods—such as Pakistan exporting tex-
tiles to Japan, which sends computers 
to Pakistan.
On the other hand, “new trade 
theory” has primarily been applied to 
explain trade between similar coun-
tries. Countries respond to consumer 
preferences for variety and choice by 
producing and trading differentiated 
versions of the same products. 
Overall, the expectation is that 
countries with similar resources trade 
different varieties of the same prod-
ucts, whose production requires com-
parable levels of technology and types 
of inputs; very different countries spe-
cialize in distinct sets of goods. 
However, in the detailed product 
data, one sees that in many cases the 
U.S. imports exactly the same goods 
from relatively less-developed nations 
as it does from rich, advanced econo-
mies. For example, in 2009 the U.S. 
imported similar nonmilitary turbofan-
powered airplanes from Canada, 
France, Israel and Brazil.3 Still, goods’ 
and countries’ characteristics mat-
ter. In 2009, 33 countries, including 
China and the U.K., were exporting 
men’s leather footwear, but only four 
countries were exporting those more-
technology-intense airplanes.4 Small 
and low-income countries export 
substantially fewer goods, and their 
exports are still concentrated in low-
level manufacturing and labor-intensive 
industries.  
This suggests that some species 
of hybrid between “new” and “old” 
theory may be at work. Peter Schott 
studied unit cost differentials within 
a product category across countries 
and found that unit values vary sys-
tematically with exporter resources.5 
For example, China’s average price 
per pair of men’s leather footwear 
was $14, but the U.K.’s average price 
was $149 in 2009. Schott argues that 
capital- and skill-abundant countries 
make intensive use of their resources 
by producing superior varieties that 
possess added features or higher qual-
ity. Low-wage countries export lower-
quality and labor-intensive varieties of 
the same goods and, consequently, sell 
those products at lower prices.  
Dynamics of Variety
A critical question is by what 
means a competitive advantage is 
gained over time. The early stages of 
producing and marketing a good are 
likely to take place close to the ulti-
mate markets, typically rich countries, 
Raymond Vernon found.6 The loca-
tion reflects a heightened need for 
flexibility in the choice of production 
technique and a requirement for reli-
able and swift communication with 
customers and suppliers. Once produc-
tion becomes standardized, differences 
in production costs invariably take 
precedence over the flexibility needed 
in the early stages. As a consequence, 
production moves to countries where 
labor and production costs of the 
more-standardized process are lower—
presumably less-developed countries. 
Still, developed countries may continue 
to produce goods through innovation 
and the manufacture of new and supe-
rior varieties.7 
There is evidence that over time 
middle- and low-income countries are 
able to move into product lines previ-
ously dominated by rich countries, 
consistent with changes in the produc-
tion location predicted by the cycle of 
product innovation and standardiza-
tion. Countries may be divided into 
three types: High-income refers to the 
richest one-third of countries in the 
sample, middle-income refers to the 
middle one-third and low-income to 
the poorest third. Of the 2,163 goods 
initially considered in 1989, only 383 
were still exclusively exported by the 
richest countries by 2007, 905 were 
exported by both high- and middle-
income countries and 621 were export-
ed by high-, middle- and low-income 
countries (Chart 2).8
Propelling the Product Cycle
Several mechanisms have likely 
contributed to developing countries’ 
ability to start exporting new product 
Chart 2
Goods Exclusively Exported by High-Income 
Countries Decline
Number of goods
High- and middle-income
High-income only
0
500
1,000
1,500
2,000
2,500
’07 ’06 ’05 ’04 ‘03 ‘02 ‘01 ’00 ’99 ‘98 ’97 ’96 ’95 ’94 ’93 ’92 ’91 ’90 ’89
High-, middle- and low-income
SOURCES: Author’s calculations using data from the U.S. International Trade Commission and “Concording U.S. 
Harmonized System Categories Over Time,” by Justin Pierce and Peter Schott, National Bureau of Economic Research, 
Working Paper no. 14837, April 2009. GDP data from “Penn World Table Version 6.3,” by Alan Heston, Robert Summers 
and Bettina Aten, Center for International Comparisons of Production, Income and Prices, University of Pennsylvania, 
August 2009.EconomicLetter  is  published  by  the 
Federal Reserve Bank of Dallas. The views expressed 
are those of the authors and should not be attributed 
to the Federal Reserve Bank of Dallas or the Federal 
Reserve System.
  Articles may be reprinted on the condition that 
the source is credited and a copy is provided to the 
Research Department of the Federal Reserve Bank of 
Dallas.
  Economic  Letter  is  available  free  of  charge 
by  writing  the  Public  Affairs  Department,  Federal 
Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 
75265-5906; by fax at 214-922-5268; or by telephone 
at 214-922-5254. This publication is available on the 
Dallas Fed website, www.dallasfed.org.
Richard W. Fisher
President and Chief Executive Officer
Helen E. Holcomb
First Vice President and Chief Operating Officer
Harvey Rosenblum
Executive Vice President and Director of Research
Robert D. Hankins
Executive Vice President, Banking Supervision
Director of Research Publications
Mine Yücel
Executive Editor
Jim Dolmas
Editor
Michael Weiss
Associate Editor
Jennifer Afflerbach
Graphic Designer
Ellah Piña
Federal reserve Bank oF dallas
2200 n. Pearl st.
dallas, tX 75201
lines. Imitating firms may reverse-
engineer products, allowing them to 
acquire the knowledge to create other 
versions. Technology may be diffused 
to manufacturers in developing nations 
in exchange for royalties or licenses 
paid to firms in developed countries. 
Advances and widespread invest-
ment in information and communica-
tion technologies as well as greater 
international capital mobility have 
lowered the costs of fragmenting the 
production process across borders. 
A developing country may begin 
exporting a new good as a result of 
a firm locating there the parts of the 
production process that are routine 
and labor intensive, such as assembly. 
Meanwhile, the company maintains 
innovative activities such as research 
and development in the developed 
country. As more firms take advantage 
of the cost savings of an increasingly 
international division of labor, contin-
ued growth in the variety of imports 
coming from developing nations can 
be expected. 
Mostashari is a visiting scholar at the Globaliza-
tion and Monetary Policy Institute of the Federal 
Reserve Bank of Dallas.
Notes
1 For the purpose of this analysis, a good is 
defined according to the 10-digit code of the 
Harmonized Tariff Schedule (HTS). Only products 
that were consistently defined over the sample 
period (1989–2009) are included. Any product 
code introduced after 1989 that became obsolete 
before 2009 or underwent some sort of redefini-
tion between 1989 and 2009 was eliminated 
from the analysis. Similarly, with the exception of 
East and West Germany, whose exports were ag-
gregated in 1989, all countries that restructured 
were eliminated from the analysis.
2 The reason for this distinction is simple: Many 
countries export the same good but at different 
unit prices. If these goods were identical in every 
way, they would need to sell at the same price 
to be competitive, a prediction that is not at all 
borne out in the data.
3 This statement refers to HTS 10-digit code 
8802300040. As a basis for comparison, real 
2007 per capita GDP for these countries was 
$36,166 for Canada, $29,632 for France, $24,047 
for Israel, but only $9,644 for Brazil. GDP data 
were taken from “Penn World Table Version 6.3,” 
by Alan Heston, Robert Summers and Bettina 
Aten, Center for International Comparisons of 
Production, Income and Prices, University of 
Pennsylvania, August 2009. 
4 The specific code for men’s leather footwear 
considered is HTS 10-digit code 6405100030.
5 See “Across-Product Versus Within-Product 
Specialization in International Trade,” by Peter K. 
Schott, Quarterly Journal of Economics, vol. 119, 
no. 2, 2004, pp. 647–78.
6 See “International Investment and International 
Trade in the Product Cycle,” by Raymond Vernon, 
Quarterly Journal of Economics, vol. 80, no. 2, 
1966, pp. 190–207.
7 See Innovation and Growth in the Global 
Economy, by Gene M. Grossman and Elhanan 
Helpman, Cambridge, Mass.: MIT Press, 1991.
8 The share exported by middle and low only, 
or low and high only, or which stopped being 
exported were consistently small numbers over 
the time frame. As such, they were omitted from 
the chart. 

Expanding variety of goods underscores battle for competitive advantage

http://www.dallasfed.org/assets/documents/research/eclett/2010/el1015.pdf

Expanding variety of goods underscores battle for competitive advantage

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics