Do the Trade Costs Relate to the Factor Content of Trade? A Comparison Between the Trans-Atlantic Trade and the Intra-European Trade

This paper extends the original Heckscher-Ohlin-Vanek(HOV) model in a modified direction, with a consideration of the pair-wise HOV model. Moreover, the original HOV model and the pair-wise HOV model both assume that there are no trade costs. This paper studies the relevance of trade costs by comparing the fit of the factor content methodology for the trans-Atlantic trade(that is, trade between the United States and several European countries), and the purely intra-European trade(that is, trade among the largest five European economies). This paper also examines trade data that includes Australia and Canada. Note by using the trans-Atlantic countries with Australia and Canada, this paper argues that the trans-Atlantic trade with Australia and Canada has higher trade costs than the intra-European trade. The sign test performs well without major amendments, but simply by restricting trade to the intra-European trade. The evidence presented in this paper is at least suggestive that trade costs may play a very significant role in trade, and therefore in the calculation of the factor content of trade.