this paper what we know about foreign trade and in what ways our understanding has improved as a result of the last 20 years of research

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This paper derives and empirically examines how factor proportions determine the structure of commodity trade. It integrates a many-country version of the Heckscher-Ohlin model with a continuum of goods developed by Dornbusch-Fischer-Samuelson (1980) with the Krugman (1980) model of monopolistic competition and transport costs. The commodity structure of production and bilateral trade is fully determined. Two main predictions emerge. There is a quasi-Heckscher-Ohlin prediction. Countries capture larger shares of world production and trade of commodities that more intensively use their abundant factors. There is a quasi-Rybczynski effect. Countries that rapidly accumulate a factor see their production and export structures systematically move towards industries that intensively use that factor. Both predictions receive support from the data. Factor proportions appear to be an important determinant of the structure of international trade.

General-equilibrium models based on increasing returns, product differentiation and monopolistic competition have attained a prominent position in trade theory and, more recently, in economic geography. This paper surveys empirical studies on issues raised by the new wave of theoretical thinking. There is a growing literature documenting spatial distributions of industries at country and regional levels, which focuses predominantly on the United States and the European Union. This body of work has produced robust findings as well as puzzles. Particular ambiguity appears in studies of location trends in the European Union. In addition, empirical researchers have devised methods to separate and test alternative theoretical paradigms. Analytical work confirms the complementarity and relevance of both neo-classical and “new ” models. Existing results, however, do not permit firm conclusions about the relative explanatory power of the main theoretical approaches for location patterns overall and in particular industries.

I develop a factor content of trade prediction for the Heckscher-Ohlin-Vanek model (HOV) that relates bilateral differences in country en-dowments to bilateral differences in factor contents. The results are striking. In comparisons of North-South factor contents or factor con-tents of countries with very different endowments (e.g., with very dif-ferent capital-labor ratios), there is clear support for an HOV sign prediction. Thus countries with dissimilar endowment ratios also have very different factor content of trade differences as predicted by the HOV model. I.

A simple model of offshoring, which depicts offshoring as ‘shadow migration, ’ permits parsimonious derivation of necessary and sufficient conditions for the effects on wages, prices, production and trade. We show that offshoring requires modification of the four classic international trade theorems. We also show that offshoring is an independent source of comparative advantage and can lead to intra-industry trade in a Walrasian setting. The model is extended to allow for two-way offshoring between similar nations and to allow for monopolistic competition. We also show that, unlike trade in goods, trade in tasks typically makes all types of workers better off in both the host and home countries (with some proviso). 1.

JEL No. F1 Study of the factor content of trade has become a laboratory to test our ideas about how the key elements of endowments, production, absorption and trade fit together within a general equilibrium framework. Already a great deal of progress has been made in fitting these pieces together. Nevertheless, the existing research raises a great many questions that should help to focus empirical research in the coming years. Among the more pressing issues is a deeper consideration of the role of intermediates, the role of aggregation biases, and of differences in patterns of absorption. This work should provide a more substantial foundation for future policy work developed within a factor content framework.

This paper addresses two questions: (i) can factor content of trade be used to measure the effect of trade on wage inequality in a given year, with tastes and technology constant; and (ii) can it be used to measure the contribution of trade to the change in wage inequality between two years, with tastes and technology allowed to change? Deardorff and Staiger (1988) had shown that the answer to the first question can be given in the affirmative provided all production functions and the utility function are Cobb-Douglas. I demonstrate, as does Deardorff (2000) independently, that the affirmative answer can be extended to the case when all production functions and the utility function take the CES form with identical elasticity of substitution. I further demonstrate that we can answer the second question in the affirmative under the same conditions as the first. I then examine critically the assumptions underlying these conclusions. They include identical elasticities of substitution across all production functions and the utility function, absence of increasing returns and non-competing imports, homotheticity of demand, and no endogenous response of factor supplies to trade. I conclude that, taken as a whole, these assumptions are sufficiently strong to leave many analysts, including myself,

The dominant paradigm of world trade patterns posits two principal features. Trade between North and South arises due to traditional comparative advantage, largely determined by differences in endowment patterns. Trade within the North, much of it intra-industry trade, is based on economies of scale and product differentiation. The paradigm specifically denies an important role for endowment differences in determining North-North trade. This paper provides the first sound empirical examination of this question. We demonstrate that trade in factor services among countries of the North is systematically related to endowment differences and large in economic magnitude. Intra-industry trade, rather than being a puzzle for a factor endowments theory, is instead the conduit for a great deal of this factor service trade.

This study tests the importance of Ricardian technology di¤erences for international trade. The developed panel includes both emerging and advanced economies, and particular attention is devoted to the variation exploited in empirical tests. The elasticity of export growth on the intensive margin to the exporter’s output development is 0.3 in preferred specifications. The elasticity for trade entry is 0.02. To provide greater empirical traction, specifications exploit uneven technology diffusion from the US through ethnic scientific networks to model Ricardian advantages. The intensive margin elasticity of exports to stronger US scientific integration is 0.15; the extensive margin elasticity is 0.01.