Growth in international trade through product differentiation has certain implications for the Heckscher-Ohlin theory, including the following:
Growth in Trade:
The developments identified above have led to a tremendous growth in absolute volume of international trade.
Intra-industry Trade:
The volume of intra-industry trade (that is, trade in substitutes; also termed two-way intra-industry trade) is growing faster than the total volume of trade.
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Irrelevance of H-O Theory:
On account of product differentiation, product prices no longer remain comparable and therefore, the claim of H-O theory that a lower cost product would be exported from the country of its origin to where its cost of production is higher, no longer remains universally valid.
Factor Prices:
The impact of trade on factor prices also becomes non- predictable. Actual impact is likely to vary from one sub-variety of a factor to the next.
However, it can be said that intra-industry trade increases the chances that “most” sub-categories of factors of production would gain rather than lose from trade.
This is particularly so because the national governments are always eager to protect the interests of such adversely affected sub-categories of factors.
Export-led Growth:
The tremendous expansion of intra-industry trade has enabled some nations (particularly small ones) in pursuing a policy of what is termed “export-led growth” that is accelerating their growth rate by specialising in some specific products or varieties thereof and exporting them.
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Some of them have also supplemented this advantage by re-exporting their imports after processing and value addition. The main beneficiaries of re-exporting are those countries which lie on international “trade routes” or which have adopted a policy of low-duty (or even duty-free) imports.
India, for example, imports precious stones and metals and exports them in the form of processed gems and jewellery.