Trade and Capital Flows: A Financial Frictions Perspective
The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, the classic conclusion does not hold. In particular, in less financially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (financial) capital flows. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows, when these are already heading from South to North. Our perspective also has implications for the effects of trade integration on factor prices. In contrast to the Heckscher-Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper-Samuelson result.
We are grateful to Davin Chor, Elhanan Helpman, Kalina Manova, Jim Markusen, and seminar participants at MIT, LSE, Stanford and the 2007 NOITS conference for useful comments. We thank Sergi Basco and especially Eduardo Morales for valuable research assistance. Caballero thanks the NSF for financial support. First draft: May 11, 2007. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, 08. citation courtesy of