Competing Gains From Trade

Differences in growth rates across countries imply a strong relation between factor proportions based trade and key aggregate economic outcomes. We construct two macro-trade datasets and illustrate that this relation is rather weak in the data. We propose a simple explanation: in the presence of intra- industry trade, pronounced trade specialization patterns culminate in a loss of varieties. In a dynamic two-country model, we illustrate that the introduction of intra-industry trade overwhelmingly subdues the inter-industry trade dynamics and realigns the behavior of standard models with the empirical evidence along various dimensions. We also provide empirical support for our mechanism: labor and capital intensive goods are traded between developed and developing countries in both directions and in similar proportions in overall trade.