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Heckscher-Ohlin: Evidence from virtual trade in value added

Discussion Papers

No.549

by LORENZO ROTUNNO, PIERRE-LOUIS VEZINA, AND TADASHI ITO
December 2015

ABSTRACT

The fragmentation of production chains across borders is one of the most distinctive feature of the last 30 years of globalization. Nonetheless, our understanding of its implications for trade theory and policy is only in its infancy. We suggest that trade in value added should follow theories of comparative advantage more closely than gross trade, as value-added flows capture where factors of production, e.g. skilled and unskilled labor, are used along the global value chain. We find empirical evidence that Heckscher-Ohlin theory does predict manufacturing trade in value-added, and it does so better than for gross shipment flows. While countries exports across a broad range of sectors, they contribute more value-added in techniques using their abundant factor intensively.

Keywords: Heckscher-Ohlin, value added, trade theory, global value chains
JEL classification: F13

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