The dominant paradigm of world trade patterns posits two principal features. Trade
between North and South arises due to traditional comparative advantage, largely
determined by differences in endowment patterns. Trade within the North, much of
it intra-industry trade, is based on economies of scale and product differentiation.
The paradigm specifically denies an important role for endowment differences in determining
North-North trade. This paper provides the first sound empirical examination of this
question. We demonstrate that trade in factor services among countries of the North
is systematically related to endowment differences and large in economic magnitude.
Intra-industry trade, rather than being a puzzle for a factor endowments theory,
is instead the conduit for a great deal of this factor service trade.