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 disconnect assumptions about the productivity from other core model parameters. In a standard macroeconomic model, we show that appropriately accounting for the factor-bias of productivity, in conjunction with endogenous capital formation, eradicates the gains from factor-proportions trade and can thus reconcile the three aforementioned stylized facts.