This paper develops a two-country model of trade and factor mobility, in which capital is sector-specific but international mobile. The model avoids the indeterminacy and propensity to specialise of Heckscher-Ohlin models and exhibits a rich variety of responses to exogenous shocks, including transfers, capital taxes and tariffs. The result throw light on the relationship between goods and factor trade, reconciling the conflicting views of previous writers. It is argued that the model holds out the possibility of a new paradigm in international trade theory, in which international factor movements play a central rather than a peripheral role.

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July 1995     Paper Number CEPDP0248