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Comparative Advantage Around the World
Introduction
International trade is critical to the success and growth of any nation. David Ricardo, an
acclaimed economist, advanced the concept that trade will happen between countries despite
one of them having an absolute advantage in producing all the products traded (Krist, n.d.). By
advancing this concept, Ricardo demonstrated the value of each country’s comparative
advantage in production (Krist, n.d.). This theory of comparative advantage is based on the
premise that even when one country can generate all goods more cheaply than any other
country, both of them can still engage in trade that allows all of them to benefit (Krist, n.d.). The
key is relative efficiency. In line with this, the paper will analyze the comparative advantage of
the United Arab Emirates (UAE).
Comparative Advantages of United Arab Emirates: Sources and Challenges
Like most, if not all, countries, the UAE has a comparative advantage that allows it to
trade successfully with other nations. Generally, a nation’s comparative advantage comes from
its natural resources, climate, excess cheap labor, accumulated capital and skills, and
government assistance given to a specific industry (Carbaugh, 2019). In the UAE’s case, its
comparative advantage is predominantly localized within its oil and natural gas industries (AlShargie & Ahmed, 2019). This is mainly driven by the country’s significant natural resource
endowments. Furthermore, the UAE is among the largest producers and exporters of oil in the
globe, an aspect that allows the country to dominate this sector at the international level (AlShargie & Ahmed, 2019). Even though oil is responsible for most of the country’s export
revenue, the UAE leverages advanced and efficient extraction technologies to support this
comparative advantage. Besides natural resource endowments, the UAE is capitalizing on its
wealth to grow its finance, trade, and logistics industries (Al-Shargie & Ahmed, 2019). Doing this
allows the country to develop a comparative advantage in areas like tourism and re-export,
especially in Dubai. UAE’s strategic location as a global trade hub is another source of its
comparative advantage. This is because this location provides easier access to Asia, Africa, and
Europe, an aspect that improves the country’s logistics and re-export capabilities (Al-Shargie &
Ahmed, 2019). Despite these comparative advantages, the UAE also faces some challenges. Its
heavy reliance on oil has left the UAE vulnerable to global oil price fluctuations and market
volatility (Al-Shargie & Ahmed, 2019). Additionally, its limited diversification of natural resources
raises issues with the long-term sustainability of the comparative advantage gained from its
natural resource endowments (oil and natural gas) (Al-Shargie & Ahmed, 2019). Despite this,
the country’s move to economic diversification demonstrates its ability to leverage the initial
comparative advantage gained from natural resource endowments to foster other competitive
industries.
Role of the Government and Policies
Governments are expected to play a greater and more proactive role in improving their
country’s competitive advantage. This role typically entails encouraging change, promoting
domestic rivalry, and stimulating innovations (Carbaugh, 2019). Furthermore, specific policy
approaches should be adopted to guide countries seeking to gain or improve their competitive
advantage. UAE’s government has done this, considering it has developed and implemented
policies focused on diversifying its economy to reduce its reliance on oil export revenues
(Shadab, 2023). The government is making significant investments in sectors like technology,
renewable energy, and tourism. Besides this, adopting initiatives like free economic zones, tax
incentives, and supporting research and development is helping the UAE attract foreign
investments and promote innovation in its emerging sectors (Shadab, 2023). All in all, the
government’s “Vision 2021” and “Energy Strategy 2050” are excellent illustrations of policies
that have been adopted to improve the UAE’s long-term competitive position within the global
economy.
Conclusion
As demonstrated in the analysis and discussion shared in this paper, the UAE is
capitalizing on its abundant natural resource endowments, especially in oil and natural gas, to
develop a strong comparative advantage in global markets. Such an advantage has allowed the
UAE to not only build its wealth but also reinvest and improve other sectors like tourism,
finance, and logistics. Despite this, issues like overreliance on oil revenues and market volatility
pose major risks to the sustainability of this comparative advantage. Adopting proactive policies
that will help diversify the UAE’s economy and reduce its dependence on oil revenues will
mitigate these issues.
References
Al-Shargie, F., & Ahmed, E. (2019, October 24). The Prosperity of UAE.
Introduction
International trade is critical to the success and growth of any nation. David Ricardo, an
acclaimed economist, advanced the concept that trade will happen between countries despite
one of them having an absolute advantage in producing all the products traded (Krist, n.d.). By
advancing this concept, Ricardo demonstrated the value of each country’s comparative
advantage in production (Krist, n.d.). This theory of comparative advantage is based on the
premise that even when one country can generate all goods more cheaply than any other
country, both of them can still engage in trade that allows all of them to benefit (Krist, n.d.). The
key is relative efficiency. In line with this, the paper will analyze the comparative advantage of
the United Arab Emirates (UAE).
Comparative Advantages of United Arab Emirates: Sources and Challenges
Like most, if not all, countries, the UAE has a comparative advantage that allows it to
trade successfully with other nations. Generally, a nation’s comparative advantage comes from
its natural resources, climate, excess cheap labor, accumulated capital and skills, and
government assistance given to a specific industry (Carbaugh, 2019). In the UAE’s case, its
comparative advantage is predominantly localized within its oil and natural gas industries (AlShargie & Ahmed, 2019). This is mainly driven by the country’s significant natural resource
endowments. Furthermore, the UAE is among the largest producers and exporters of oil in the
globe, an aspect that allows the country to dominate this sector at the international level (AlShargie & Ahmed, 2019). Even though oil is responsible for most of the country’s export
revenue, the UAE leverages advanced and efficient extraction technologies to support this
comparative advantage. Besides natural resource endowments, the UAE is capitalizing on its
wealth to grow its finance, trade, and logistics industries (Al-Shargie & Ahmed, 2019). Doing this
allows the country to develop a comparative advantage in areas like tourism and re-export,
especially in Dubai. UAE’s strategic location as a global trade hub is another source of its
comparative advantage. This is because this location provides easier access to Asia, Africa, and
Europe, an aspect that improves the country’s logistics and re-export capabilities (Al-Shargie &
Ahmed, 2019). Despite these comparative advantages, the UAE also faces some challenges. Its
heavy reliance on oil has left the UAE vulnerable to global oil price fluctuations and market
volatility (Al-Shargie & Ahmed, 2019). Additionally, its limited diversification of natural resources
raises issues with the long-term sustainability of the comparative advantage gained from its
natural resource endowments (oil and natural gas) (Al-Shargie & Ahmed, 2019). Despite this,
the country’s move to economic diversification demonstrates its ability to leverage the initial
comparative advantage gained from natural resource endowments to foster other competitive
industries.
Role of the Government and Policies
Governments are expected to play a greater and more proactive role in improving their
country’s competitive advantage. This role typically entails encouraging change, promoting
domestic rivalry, and stimulating innovations (Carbaugh, 2019). Furthermore, specific policy
approaches should be adopted to guide countries seeking to gain or improve their competitive
advantage. UAE’s government has done this, considering it has developed and implemented
policies focused on diversifying its economy to reduce its reliance on oil export revenues
(Shadab, 2023). The government is making significant investments in sectors like technology,
renewable energy, and tourism. Besides this, adopting initiatives like free economic zones, tax
incentives, and supporting research and development is helping the UAE attract foreign
investments and promote innovation in its emerging sectors (Shadab, 2023). All in all, the
government’s “Vision 2021” and “Energy Strategy 2050” are excellent illustrations of policies
that have been adopted to improve the UAE’s long-term competitive position within the global
economy.
Conclusion
As demonstrated in the analysis and discussion shared in this paper, the UAE is
capitalizing on its abundant natural resource endowments, especially in oil and natural gas, to
develop a strong comparative advantage in global markets. Such an advantage has allowed the
UAE to not only build its wealth but also reinvest and improve other sectors like tourism,
finance, and logistics. Despite this, issues like overreliance on oil revenues and market volatility
pose major risks to the sustainability of this comparative advantage. Adopting proactive policies
that will help diversify the UAE’s economy and reduce its dependence on oil revenues will
mitigate these issues.
References
Al-Shargie, F., & Ahmed, E. (2019, October 24). The Prosperity of UAE.
Carbaugh, R.J. (2019). International Economics (17th ed.). Cengage Learning, Inc.
Krist, W. (n.d.). Chapter 3: Trade Agreements and Economic Theory. Wilson
Center.
Shadab, S. (2023). The new Arab Gulf: evaluating the success of economic diversification in the
UAE. In Social Change in the Gulf Region: Multidisciplinary Perspectives (pp. 415-430).
Singapore: Springer Nature Singapore.
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