On the Factor Content of Trade

Theories of international trade have severe difficulties in explaining why, despite i) substantial differences in factor-proportions across industries and ii) considerable cross-country differences in capital-labor ratios, the iii) capital intensity of U.S imports does not vary systematically across countries. We propose a simple explanation: standard trade theories treat the distribution of productivity across industries as exogenous. In a standard macroeconomic model we show that endogenizing this driving force eradicates the gains from factor-proportions trade and can thus reconcile the three aforementioned stylized facts.