Trade between similar countries: implications of decreasing costs and imperfect competition

The factor proportions or Heckscher-Ohlin theorem, which was presented in the previous chapter, implies that trade should occur primarily between pairs of countries with very different relative factor endowments. As noted earlier, that theory is most successful in explaining trade between many industrialized and developing countries: the industrialized countries import unskilled labor and tropical land-intensive products from less developed countries (LDCs), and export skilled labor and temperate-climate land-intensive goods to them.