Cross-Country Technological Differences as a Determinant of Vertical Intra-Industry Trade: a Theoretical Model

Vertical intra-industry trade accounts for a large share of trade between countries characterized by similar factor endowments. Moreover, it is observed even at a very disaggregated level of statistical classifications, suggesting that the traded products have similar factor intensities. This paper aims at modelling trade in vertically differentiated goods that are produced with the same factor intensity at any given factor prices ratio. In a neoclassical setting including three goods and two factors, we allow for Hicks-neutral technological differences across countries and we show that vertical intra-industry trade can be driven by these differences in technology.