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this, they simply deepened the puzzle. For the main form of trade growth within
Europe after 1958 was “intra-industry” trade: countries selling each other seem-
ingly similar products, at least as measured by standard industrial classifications.
What was going on here?
The Balassa-Grubel-Lloyd answer was, increasing returns and monopolistic
competition: countries were specializing in different products, often different
products within industries, so as to take advantage of economies of scale, and this
specialization was giving rise to international trade. At the time their insight made
little impact on international trade theory, because nobody knew how to embed
increasing returns and monopolistic competition in formal models. But a decade
later we had the tools to do that, and the New Trade Theory was born.
One way to think about that theory—not the way we thought about it at the time,
but one that makes sense in retrospect—was that it argued that a significant part of
world trade was actually similar in both form and motivation to interregional trade.
Or to put it a bit differently, when it came to trade within Europe, or between the
United States and Canada, Ohlin's dictum about the identity of international trade
theory and location theory was exactly right. Trade between the U.S. and Canada is
a lot like trade between Michigan and New York, trade between Norway and France
a lot like trade between southern England and Scotland.
But this was only true for trade among similar countries. Meanwhile, a funny
thing happened to the world economy after 1980, and even more so after 1990 or so:
the center of gravity of world trade shifted, with trade among advanced countries
more or less stagnating relative to GDP while trade between advanced and devel-
oping countries soared. And there was every reason to believe that the new growth
in trade involved much more old-fashioned comparative advantage than the trade
that inspired the New Trade Theory.
Why? Because more and more of world trade takes place between countries at
very different levels of development, with correspondingly different resources,
factor prices, and technology. Take one measure suggested by Subramanian and
Kessler (
2013
), the average income level of exporters to advanced economies—that
is, per capita GDP of exporters weighted by their shares in imports. As they show,
between 1990 and 2010 the average income level of exporters to Europe fell from
roughly 100 to 75 %; the corresponding decline for the United State was from 70 to
50%. This is telling us that a rapidly growing share of both European and
U.S. imports was coming from countries with much lower incomes, wages,
human and physical capital, etc. than the importing nations.
We can be reasonably sure that such trade was driven not by increasing returns
but by comparative advantage. To take an example: while there are doubtless
important increasing returns in the apparel industry, as demonstrated by the
one-time concentration of that industry in a single district of Manhattan, the fact
that Bangladesh exports apparel and the U.S. imports apparel clearly reflects the
interaction between Bangladeshi
labor abundance and apparel-industry labor
intensity.
Now, within this overall pattern of comparative-advantage-driven trade, there is
a fascinating economic geography story. Take the case of China: as Walter Isard
