Bilateral Predictions in a Multilateral World? Revisting the Theory

Abstract

This paper addresses Choi and Krishna's (2004) recent empirical test of a bilateral factor content of trade prediction, originally developed by Helpman (1984). I revisit the theory and show that, contrary to common belief, Helpman's paper does not generalize Brecher and Choudhri's 2-country prediction on the factor content of trade to multiple countries. I reconsider Helpman's proof and show that bilateral factor price differences restrict an arbitrary number of bilateral and multilateral factor flows. This implies that the basic lesson from the comparative advantage commodity trade literature applies also to the factor content of trade: bilateral comparisons are not relevant in a multi-country world.