Recent Theories of International Trade: Some Implications for the South

Over the last thirty years, a set of new theories has been put forward to complement (and/or substitute for) the simple Heckscher-Ohlin (H-O) model. The new theories were a response to two deficiencies in the H-O paradigm. First, the oversimplified and often patently unrealistic, assumptions behind H-O, especially in the simplest textbook versions: these include ‘perfect competition, international identity of production functions and factors, non-reversibility of factor intensities and international similarity of preferences’,1 together with constant returns to scale, if the usual free trade, and specialisation in accordance with factor endowment, conclusions are to be derived. Second, the theory, at least superficially, seemed incapable of explaining certain significant empirical findings about the world economy. These included the Leontief paradox; the growth in trade between similar economies with near-identical factor endowment; the fact that a considerable portion of trade in manufacturers (and its growth) is intra-industry; and the fact that there appears to be a strong tendency for growth in trade to exceed growth in income.