When vintage technology makes sense : matching imports to skills

Trade policies in many developing countries discriminate--through import bans, licensing requirements, or higher tariff rates. Even Australia adds a $12,000 tariff on used cars. Such discrimination is often motivated by the desire to protect domestic industries from competition from low-priced goods, to avoid becoming a dumping ground for castoffs from high-income countries,or to push domestic industries toward the technological frontier. But trade restrictions on used capital goods may be inappropriate in countries where low wages and high interest rates call for labor-intensive production processes. Older equipment is likely to be more labor-intensive than new equipment because technological changes tend to be labor-saving and older equipment requires greater maintenance and presents greater risk of machine downtime. In this empirical analysis of international trade in production machinery, the authors examine choices between new and used equipment, when there is labor-saving technical progress and the skills and technology available in a firm complement each other. They examine US exports of metalworking machine tools by country of destination, classifying machines by vintage technological characteristics. They do so by developing a new method for classifying trade data on machines according to the minimum technological skills necessary to operate them. They are consequently able to use trade data to measure technology transfer. The main findings: 1) The lower a country's level of development--as measured by such indicators as per capita income, wages, and average education--the greater the share of used equipment imported by the country. 2) Imports of used machinery are greater, the faster the technical change and the greater the skills required to run the machinery efficiently. They conclude that technological factors and skill constraints may be far more important than wage and interest-rate differentials in determining a firm's choice of technique in developing countries. Consequently the technological gap between advanced and developing economies rises when machines embody faster technological progress. The authors argue against constraints on imports of used equipment, not for the reason often given in existing literature--inappropriate capital-labor ratios in low-wage countries--but because investing in advanced technologies makes sense only if the countries importing them have the skill to use them.