Do Rich and Poor Countries Specialize in a Different Mix of Goods? Evidence from Product-Level US Trade Data

Unit values of US imports at the product level reveal a substantial degree of vertical product differentiation among countries exporting to the US. This specialization, consistent with both the factor proportions framework and product cycle theory, is not apparent by looking at trade flows alone. Two trends stand out. First, the portion of US import products originating in either rich or poor countries exclusively has fallen dramatically as US trade barriers have fallen, from 41% in 1972 to 17% in 1994. Indeed, by 1994, nearly three quarters the products imported into the US were sourced simultaneously from rich and poor countries. Second, within-product unit value dispersion is positively and significantly correlated with source country income: men’s shirts imported from Japan in 1994, for example, are about thirty times as expensive as shirts originating in the Philippines. Taken together, these trends convey a stark warning: industry-level trade data alone are too coarse to meet the assumptions underlying most tests of trade theory.