Determinants of comparative advantage and its dynamic relationship with trading partners: The case of Egypt

Abstract

Egypt is a promising market. It is full of auspicious economic opportunities for investments. These can be found in natural resources and low-cost labour sectors, which are considered scarce resources in many countries in the Global North. The theory of comparative advantage plays a vital role in assessing the strength of the country’s exports. Comparative advantage has been heavily investigated in trade literature; however, it is not extended to measure the interdependence of this advantage on the trading partners. Thus, the objective of the paper is to compute the Egyptian comparative advantage through its Revealed Comparative Advantage (RCA) index, as well as measure the interdependence that RCA have between the country and its trading partners. The paper will be using a panel data approach incorporating stationarity and causality tests. The findings revealed that when natural resource needs outnumber technology and quality needs, RCA has a causal effect on the macroeconomic variables of trading partners. Besides, when natural resources are needed for technology and quality needs, therefore, unidirectional causality relationship, trading partners’ macroeconomic variables have a causality effect on the Egyptian RCA. Lastly, when natural resource needs equal technology and quality needs, there is a bidirectional causality relationship between Egyptian RCA and trading partners. The research findings and recommendations are in line with the vital role of trade in Africa and elsewhere in the Global South through stable macroeconomic variables, sustained growth, maximising value-added, creating job opportunities and increasing the real GDP per capita.