Abstract:

This paper searches for diversification cones using the cross-section data of 10 rich OECD countries. In frictionless trade models, cones are identified by comparing the distributions of factor usage intensities across countries. The results of both non-parametric and regression estimations suggest that there are at least 3 diversification cones, and countries in different cones have both larger differences in factor endowments and larger differences in factor usage intensities. The non-parametric estimation is robust to the same industries representing different goods across countries. In trade models with positive transport costs, if the countries identified as in different cones in frictionless models are assumed to be in the same cone, simulation suggests that transport costs need to be as high as 50% for trans-English-channel trade and 100% for trans-Atlantic trade, in order for the observed differences in factor endowments to generate the observed differences in factor usage intensities.