Commodity trade and financial asset trade are both integral parts of globalization, yet little has been studied on their interplay. In a framework that integrates these two paradigms of trade, a new force driving international capital flows emerges: capital tends to flow towards countries that become more specialized in capital-intensive industries (a composition effect). This force competes with the standard, "convergence force" which channels capital towards the location where it is more scarce, in response shocks such as globalization, country-specic labor force or labor-technology shock shocks. If the composition eect dominates, capital ows away from the country hit by a positive shock, a flow reversal", and asset prices rise globally rather than locally. Two implications arise: rich countries' current account decits may be a consequence of their shifting towards capital-intensive industries; young and fast growing developing countries may help sustain asset prices in an aging industrialized world. Predictions of the current account and specialization patterns are shown to be consistent with the data.
