A Symmetry Hypothesis and Measurement Biases in the Factor Content of Trade

I revisit Reimer (2006), and Trefler and Zhu (2005, 2006) (RTZ) tests of the Vanek proposition in the presence of international differences in production techniques and global production sharing. In this framework, knowing the bilateral details of each country’s input-output structure is key to the correct calculation of the factor content of trade. Because input-output tables typically lack this detail, RTZ impute the relevant input-output coefficients using a method that implicitly assumes that international flows of goods respond to trade determinants independently of their end-use (Symmetry Hypothesis). This paper uses survey-based input-output coefficients from the Asian Input-Output tables (AIO) that do provide bilateral detail. Exploiting methodological differences in the compilation of the AIO tables and the data underlying RTZ studies, I empirically test the symmetry hypothesis and find that it fails. This failure causes input-output data imputed following RTZ methodology to overstate the gross quantity of both domestic and foreign factors’ services embodied in a country’s trade. However, both biases are systematic and tend to cancel each other out resulting in only a small positive bias on net flows of factors and in the performance of the Vanek proposition.