The core subjects of trade theory are the pattern and volume of trade: which goods are traded by which countries, and how much of those goods are traded. The first part of this paper discusses evidence on comparative advantage, with an emphasis on carefully connecting theoretical models with data analyses. The second part of the paper considers the theoretical foundations of the gravity model, and reviews the small number of studies that have tried to test, rather than simply use, the implications of gravity. Both parts of the paper yield the same conclusion: we are still in the very early stages of empirically understanding specialization and the volume of trade, but the work that has been done can serve as a starting point for further research.

Do New York and Nashville face the same pressures from increased trade? This paper considers the role of international trade in shaping the product mix and relative wages for regions within the US. Using the predictions from a Heckscher-Ohlin trademodel,weaskwhetheralltheregionsintheUSfacethesamerelativefactor prices. Using the production side of the HO model, we derive a general test of relative factor price equality that is robust to unobserved regional productivity differences, unobserved regional factor quality differences, and variations in production technology across industries. Using data from 1972-1992, we reject the the hypothesis that all regions face the same relative factor prices in favor of an alternative with at least three distinct factor price cones. Sort regions into cones with similar relative factor prices, we find that industry mix varies systematically acrossthegroups. Regionsthatswitchconesovertimehavemorechurningof industries.

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.

Australian Centre for International Agricultural Research (under PN9449) and the World Bank for financial assistance. Will Trade Liberalization Harm the Environment? The Case of Indonesia to 2020

Empirical work relating trade liberalization and income distribution has identified an important anomaly. The Stolper-Samuelson theorem predicts that trade liberalization will shift income toward a country’s abundant factor. For developing countries, this suggests liberalization will principally benefit the abundant unskilled labor. Yet extensive empirical studies have identified many cases with a contrary result. This paper develops a simple theoretical explanation for this anomaly. It shows that countries which are labor abundant in a global sense may see wages decline with liberalization if they are capital abundant in a local sense. The current absence of empirical work that would allow us to identify the relevant local abundance implies that virtually all assertions regarding anticipated distributional consequences of trade liberalization are without foundation. There may likewise be important implications for industrialized countries that border developing countries undertaking trade liberalization, particularly in regard to the incentives for migration.

Arguments abound for the relatively poor economic performance of Latin America over the past 30 years. Many of these explanations attribute the region’s troubles, including low growth and high income inequality, to a particular set of political choices made by governmental leaders. In this paper we take a different tack, revisiting the structuralist arguments with a new version of a familiar theoretical framework- the Heckscher-Ohlin model. The model of international comparative advantage that has been internalized by most economists is the 2-good 2-factor Heckscher-Ohlin model which implies, among other things, factor price equalization. This 2 by 2 model is not an appropriate setting in which to discuss development generally or the effects of natural resource abundance on growth and inequality. More goods and more factors are needed. Leamer(1987) has shown using the three-factor multi-good model that countries rich in natural resources can have a path of development that is very unlike the paths taken by resource poor countries. Our goal here is to explore that idea as carefully as possible by developing five related hypotheses regarding the effect of natural resources on development: 1 Delays: Natural resources absorb capital, delaying the emergence of manufacturing At the first stages of development when capital is very scarce, the best investment opportunities of resource rich countries are in extraction of resources and sowing of permanent crops, 1 and not in manufacturing. The absorption of scarce savings into natural resource sectors delays the emergence of manufacturing. Compared with countries that are poor in natural resources, these resource rich countries have higher per capita incomes because of earnings from the resources. But the resource-rich countries have greater income equality because manufacturing promotes equality by raising wages for unskilled workers and by increasing the demand for human capital which, by its nature, is more broadly owned than land or physical capital.

Many policy makers are concerned about dependence on resource exports. This paper examines four changes that can potentially reduce this dependence: (i) accumulation of capital and skills; (ii) changes in protection policy, particularly reductions in the burden of protection on exporters; (iii) differential rates of technical change; and (iv) declines in transport costs. Developing countries as a group have made enormous progress in diversifying their exports away from resources in recent decades, a development that appears to have been aided by accumulation of capital and skills and by dramatic reductions in the cost of protection to exporters, but slowed down by technological advances that favored agriculture.

We develop a methodology for identifying departures from relative factor price equality across regions that is valid under general assumptions about production, markets and factors. Application of this methodology to the United States reveals substantial and increasing deviations in relative skilled wages across labor markets in both 1972 and 1992. These deviations vary systematically with labor markets industry structure both in cross section and over time.

AGRICULTURE AND THE WTO: NEXT STEPS Kym Anderson, Bernard Hoekman and Anna Strutt The potential welfare gains from further liberalizing agricultural markets are huge, both absolutely and relative to gains from liberalizing textiles or other manufacturing. The probability of the next WTO round delivering sizeable farm protection cuts would be greater if better WTO rules regarding domestic regulatory policies were introduced, as they could reduce the risk of farm trade measures being replaced with domestic agricultural assistance that may be almost as tradedistorting. The challenge for analysts is to identify and assess feasible policy packages that facilitate genuine agricultural reform rather than encourage inefficient re-instrumentation. Such assessment will require significant improvements in both analytical tools and databases. Keywords: WTO, multilateral trade negotiations, agricultural policy reform, new trade issues JEL codes: F13, K33, Q17, Q18 Kym Anderson School of Econo...

this paper are his own, not those of DFID. The paper draws on earlier work with Jrg Mayer, who also made valuable comments on an earlier draft, as did Enrique Aldaz, Nick Amin, Victor Bulmer-Thomas, Alexis Ferrand, Paul Isenman, Gavin McGillivray, Kevin O'Rourke, Sheila Page, Paul Spray and two anonymous referees. Elizabeth Turner provided excellent research assistance