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arguing (and attempting to model) the point that the same forces the New Trade
Theory had diagnosed as drivers of international trade could also be seen as drivers
of interregional trade, specialization, and agglomeration.
Yet if you think about it, Ohlin and Isard were in a way offering opposed points
of view. Ohlin was saying that we could think of interregional trade employing the
same approaches we used to think about international trade—and while Ohlin made
mention in passing of the role of industry clusters in causing trade, his main models
of international trade, like those of almost everyone at the time, were models of
perfect competition. Isard was saying that such models would not and could not
make sense of the location of activity in space within countries, that a new
framework, one that involved monopolistic competition, was needed.
So who was right? In what follows, I'll try to make the case that the answer,
mostly, is that Isard was right. Certainly the perfectly competitive models of the Old
Trade Theory won't do for regional science, while they do a decent job of making
sense of much though not all trade. As a practical matter, interregional and
international trade are on average quite different, although there is an overlap.
I'll also try to make two empirical points. One is that international trade has
become
less
like interregional trade over the past couple of decades. The other is
that because the two kinds of trade are different, they have had different destinies:
international trade has soared in an era of “hyperglobalization” [to use the term of
Subramanian and Kessel (
2013
)], while interregional trade has not, and may even
be lagging overall economic growth.
3.1
America Is Flat
Traditional trade theory starts with the notion of comparative advantage, which we
may define loosely as the view that countries trade to take advantage of their
differences. Ricardo emphasized differences in productivity, which he may have
considered the result of differences in climate, national character etc. but which we
would nowadays usually attribute to technology. Ohlin, following on Heckscher,
emphasized the role of differences in resources, and under the defter modeling hand
of Paul Samuelson this became the famous factor proportions model, in which
countries export goods whose production intensively uses their abundant factors.
(Still a mouthful after all these years.)
It's a beautiful model. But—ironically given the title of Ohlin's topic—it breaks
down if you try to apply it to interregional trade. The factor proportions theory
requires that there be differences in relative resource abundance among regions in
order for them to trade, and if we add in transport costs those differences in
abundance (a) have to be sufficiently large (b) will lead to differences in factor
prices. But if factors are mobile—one of the defining differences between interna-
tional and interregional economics—they will move to where their return is highest,
narrowing the factor-price differences and eliminating the reason to trade. As
Mundell (
1957
) pointed out long ago, in Ohlin-type models factor mobility and
