Chart of the Week: Using RCAs to gauge the gains from trade

Using data from Fathom’s proprietary RICArdo database, the chart shows the Revealed Comparative Advantage (RCA) of China in 20 key sectors. The RCA gauges the degree of sectoral export specialisation a country has, with a value above one indicative of a country exporting relatively more of that good or service than is typical globally. China has a high RCA in manufacturing and low ones in service sectors. Trade gains can potentially be large when countries trade with those with different sectoral specialities and, hence, with the least-correlated RCAs. For example, China and the US have an RCA correlation of -0.64 over all sectors, with the US specialising in service sectors compared to China. Thus, while there are clearly significant difficulties in the US-China relationship at the present time, not least on the trade front, the RCA data suggest that both economies could benefit if a compromise is eventually reached. Problematically though, and a point that we have highlighted in the past, US net exports to China are low even in the sectors in which the US specialises.