Do Countries Specialize?

Do rich and poor countries export the same goods to the US? Using highly disaggregate trade flow data – which breaks US imports into thousands rather than tens of goods – this paper documents two significant trends. First, the number of US imports originating in either rich or poor countries exclusively has fallen dramatically as the world has globalized, from 50% in 1972 to 25% in 1994. This growth in intra-sector competition by countries with vastly different factor endowments is greatest in manufacturing, particularly apparel and textiles, and smallest in natural resources. Further analysis reveals a puzzle: when rich and poor countries both export a manufactured good to the US, rich countries receive a significantly higher price for their product than poor countries. To the extent that this signal of unobserved product heterogeneity is motivated by relative factor abundance or innovative potential, it is consistent with the type of specialization implied by both the Heckscher-Ohlin model of trade and Product Cycle Theory. Though supportive of specialization, this intra-aggregate heterogeneity is troubling for empirical research because it indicates that even a very fine categorization of commodities may be too coarse for evaluating trade models.