Rehabilitating Heckscher-Ohlin

The Heckscher-Ohlin theory of international trade is an enigma of sorts. Despite being falsified on numerous counts (Bowen, Leamer and Sveikauskas 1987, Trefler, 1995), it persists as one, if not the central, theory of international trade, found both in undergraduate and graduate textbooks, not to mention in research. Clearly, while it has failed to be confirmed by the data, the notion that factor proportions motivate trade, whether at the regional or national level, continues to hold sway. This paper is an attempt at recasting the debate over the question of factor proportions and its role in interregional and international trade. Its starting point is simple and straightforward, namely that the factor proportions theory of international trade, developed in large measure by Paul Samuelson, is one but not the only possible---formalization of what we call the Heckscher-Ohlin hypothesis (HOH). To this end, an alternative formalization, based on a different set of assumptions is presented, tested and confirmed by the data. It concludes by examining the policy implications.