Introduction

Robert Mundell's seminal article on ‘International Trade and Factor Mobility’ was published 40 years ago, and its conclusion threw down a challenge: Can history tell us whether (and when) trade and factor mobility are substitutes? 40 years seems long enough to wait, so this chapter finally rises to Mundell's challenge by interpreting trade theory in the light of history and by investigating empirically the connection between trade and factor flows in the Atlantic economy between 1870 and 1940. The epoch prior to the First World War is especially interesting in this regard since it is a liberal world environment providing a good natural experiment.

In the 40 years since Mundell wrote, trade theorists have come to understand that theory is ambiguous on this issue. Whether trade and factor mobility are complements or substitutes depends on the assumptions made in the theory. If ever there was an open invitation for empirical research, this surely is it. Yet, few efforts have been made to identify econometrically the complementarity or substitutability between factor flows and international trade (see Wong, 1988). Perhaps history may prove to be a valuable guide to choosing among these assumptions.