Intra-Industry Trade

10 Key excerpts on "Intra-Industry Trade"

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  eBook - ePub

  Applied International Economics

  • W. Charles Sawyer, Richard L. Sprinkle(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER 5

  Intra-Industry Trade

  Most students of international trade have long had at least a sneaking suspicion that conventional models of comparative advantage do not give an adequate account of world trade … [I]t is hard to reconcile what we see in the manufactures trade with the assumptions of standard trade theory.

  Paul Krugman

  INTRODUCTION

  I n our analysis of international trade you have learned why countries have a comparative advantage in producing different types of goods. The U.S. has a comparative advantage in machines and India in cloth because they are endowed with different factor proportions. However, a large share of international trade is not based on comparative advantage that results from different factor endowments. Countries also trade essentially the same goods with one another. This is known as Intra-Industry Trade. In this chapter, we will explain what Intra-Industry Trade is and how it differs from the interindustry trade that we have considered in the previous three chapters. As we will see, Intra-Industry Trade is determined by factors that differ from those involved in interindustry trade. As a result, a large part of this chapter is dedicated to explaining why Intra-Industry Trade occurs. Finally, we will examine the welfare effects of Intra-Industry Trade and show that it is as beneficial as interindustry trade.

  DEFINING Intra-Industry Trade

  Unfortunately, Intra-Industry Trade between countries coupled with the factor-proportions theory as the basis of trade poses a logical problem. The premise of the factor-proportions theory is that each country exports goods in which it has a comparative advantage. This comparative advantage reflects a country’s ability to produce the good at a lower opportunity cost. Countries have different opportunity costs because they have different resource endowments. As a result, the factor-proportions theory provides a basis for interindustry trade but not for Intra-Industry Trade.

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  International Economics

  • Dominick Salvatore(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Similarly, while Nation 2 will still be a net exporter of commodity Y, it will also import some varieties of commodity Y and export some varieties of commodity X. The net exports of X and Y by Nations 1 and 2, respectively, reflect inter-industry trade, which is based on comparative advantage. On the other hand, the fact that Nation 1 also imports some varieties of commodity X and exports some varieties of commodity Y, while Nation 2 also imports some varieties of commodity Y and exports some varieties of commodity X (i.e., the fact that there is an interpenetration of each other’s market in each product) reflects Intra-Industry Trade, which is based on product differentiation and economies of scale. Thus, when products are homogeneous, we have only inter-industry trade. On the other hand, when products are differentiated, we have both inter- and Intra-Industry Trades. The more similar nations are in factor endowments and technology, the smaller is the impor-tance of inter-relative to Intra-Industry Trade, and vice versa. Since industrial nations have become more similar in factor endowments and technology over time, the importance of intra-relative to inter-industry trade has increased. As pointed out earlier, however, a great deal of Intra-Industry Trade is also based on differences in international factor endowments (when factors are defined less broadly and in a more disaggregated way). 6.4E Another Version of the Intra-Industry Trade Model We now examine Intra-Industry Trade from a different perspective with the aid of Fig-ure 6.3. The horizontal axis in Figure 6.3 measures the number of firms ( N ) in a monopo-listically competitive industry, while the vertical axis measures the product price ( P ) and the average or per unit cost of production ( AC ). All firms sell at the same price even though their product is somewhat differentiated.

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  Explaining International Production (Routledge Revivals)

  • John H. Dunning(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  O advantages of firms, which may strongly reflect their country of origin (Dunning, 1981, Chapter 4). Like specialization based on vertical trade in the spot market, such inter- Intra-Industry Trade flourishes in unrestricted markets; however, as consumer tastes may not be uniform across national boundaries, the characteristics of individual markets may play a more important role than in vertical trade.

  The second kind of horizontal inter-Intra-Industry Trade arises where the production of the goods in question requires different technologies and factors of production, but where the goods themselves are fairly close substitutes in consumption, e.g. leather and rubber footwear, nylon and cotton shirts, wooden and plastic chairs. As an explanation of this kind of trade, the disposition of factor endowments probably assumes a more important role; indeed, not only may goods be traded across countries, but between different firms in the same countries. Yet, sometimes there may be an element of complementarity in production, such as where a range of products requires similar distribution facilities. Therefore, O-specific advantages that relate to transaction-cost economizing might move in the opposite direction to L-specific advantages.

  Through contracts The motives for engaging in inter/intra-industry contractual transactions in goods and services are similar to those in the case of inter-industry transactions, but the nature of market imperfections may be different. While the desire to minimize the risks of supply instabilities may dominate contract inter-industry trade, quality control aspects are more likely to be important in its inter/intra equivalent. In this case, the O advantages enjoyed by the contractor are likely to be in the area of codifiable knowledge, while the contractee gains access to the markets of the contractor. In cases of shifting L

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  International Economics

  • Dominick Salvatore(Author)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  A1. 6.4 Imperfect Competition and International Trade 145 Intra-Industry Trade arises in order to take advantage of important economies of scale in production. That is, international competition forces each firm or plant in industrial countries to produce only one, or at most a few, varieties and styles of the same product rather than many different varieties and styles. This is crucial in keeping unit costs low. With few varieties and styles, more specialized and faster machinery can be developed for a continuous operation and a longer production run. The nation then imports other varieties and styles from other nations. Intra-Industry Trade benefits consumers because of the wider range of choices (i.e., the greater variety of differentiated products) available at the lower prices made possible by economies of scale in production. Case Study 6-4 examines the large welfare gains that arise from the ability of consumers to greatly increase the variety of goods that they can purchase with trade. The importance of Intra-Industry Trade became apparent when tariffs and other obstructions to the flow of trade among members of the European Union, or Common Market, were removed in 1958. Balassa found that the volume of trade surged, but most of the increase involved the exchange of differentiated products within each broad industrial classification. That is, German cars were exchanged for French and Italian cars, French washing machines were exchanged for German washing machines, Italian typewriters for German and French typewriters, and so on. Even before the formation of the European Union, plant size in most industries was about the same in Europe and the United States. However, unit costs were much higher Until now, the welfare gains from trade have been measured by the reduction in the price of imported goods and their greater consumption.

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  Dynamic Capabilities Between Firm Organisation and Local Systems of Production

  • Riccardo Leoncini, Sandro Montresor(Authors)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  12 Vertical and horizontal patterns of Intra-Industry Trade between EU and candidate countries

  Hubert Gabrisch and Maria Luigia Segnana

  Introduction

  Trade flows are usually identified as being of inter-industry or intra-industry type. Inter-industry trade takes place when countries export and import goods produced by different industries. This type of specialization can be explained by factor endowment differences between the countries. The similarity of the countries generates a different type of trade flow, that is, Intra-Industry Trade (IIT) or trade in similar goods.

  The models produced by early IIT research (the “first generation”) assumed it to be characterized by the exchange of varieties of the same quality backed by the same technologies; but in recent years one of the issues addressed by IIT is the distinction between horizontal and vertical product differentiation. The “second generation” of IIT models distinguishes two different flows of IIT: trade in varieties of similar qualities (horizontal or HIIT), and trade in different qualities (vertical or VIIT), which is explained by different determinants. This distinction means that industry or country characteristics of IIT may differ according to the type of product differentiation. Moreover, this distinction has certain implications for the welfare analysis of economic integration (Facchini and Segnana, 2003).

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  Trade, Theory and Econometrics

  • James R. Melvin, James C. Moore, Raymond G Riezman(Authors)
  • 2012(Publication Date)
  • Taylor & Francis

    (Publisher)

  2   We may recall the questions raised by this procedure, unresolved to this date, when the Chamberlin-Robinson revolution broke out in the early 1930s, and particularly Robert Triffin’s (1940) argument that there was no persuasive way to break and segment the chain of commodities into industry groups and that it was best to abandon the concept of industry. Evidently, while theorists are aware of this problem, they have had to proceed as if there was a satisfactory definition of industry as an agglomerate of commodities that are close substitutes in consumption whereas outside-of-industry commodities are less close substitutes with the intraindustry commodities.

  3   This emphasis on localized technical change, based on local market conditions, as a source of advantage resonates in the current business school literature, as in Michael Porter’s (1990) The Competitive Advantage of Nations. Of course, his aim was to account for concentration of activity, but is easily adapted to account for several centers, each based on local characteristics, with intraindustry exchange.

  4   This finding of Finger’s raises serious difficulties also for the economists who have used the factor-intensity definition of intraindustry trade while also citing SITC data to argue that there is a great deal of intraindustry trade today.

  5   To our knowledge, however, any formal demonstration of a “larger” volume of trade between countries with dissimilar rather than similar endowments is not to be found in the literature for the simple reason that the theory of bilateral trade in a multi-country world is practically non-existent.

  6

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  Comparative advantage, however, at least at first glance, does not seem especially well-suited to explain other common patterns of international trade. The Prevalence of Intra-Industry Trade between Similar Economies The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Roughly half of all U.S. trade involves shipping goods between the fairly similar high-income economies of Japan, Canada, and the United States. Furthermore, the trade has an important geographic component—the biggest trading partners of the United States are Canada and Mexico (see Table 20.13). Country U.S. Exports Go to ... U.S. Imports Come from ... China 8.6% 17.7% Canada 17.6% 12.6% Japan 4.3% 4.3% Mexico 15.8% 13.6% South Korea 3.8% 3.3% TABLE 20.13 Top Trading Partners (November 2021) (Source: https://www.census.gov/foreign-trade/statistics/highlights/ toppartners.html) Moreover, the theory of comparative advantage suggests that each economy should specialize to a degree in certain products, and then exchange those products. A high proportion of trade, however, is Intra-Industry Trade—that is, trade of goods within the same industry from one country to another. For example, the United States produces and exports autos and imports autos. Table 20.14 shows some of the largest categories of U.S. exports and imports. In all of these categories, the United States is both a substantial exporter and a substantial importer of goods from the same industry. In 2021, according to the U.S. Census Bureau, the United States exported $131 billion worth of autos, and imported $317 billion worth of autos. About 60% of U.S. trade and 60% of European trade is Intra-Industry Trade. 20.3 • Intra-Industry Trade between Similar Economies 491

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  Frontiers of Research in Intra-Industry Trade

  • P. Lloyd, H. Lee, P. Lloyd, H. Lee(Authors)
  • 2002(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The second section provides a short assessment of the debate about whether the phenomenon of intra-industry is compatible with competitive trade theory. I argue that the latest theoretical literature on this subject has inarguably refuted the popular view that the existence of Intra-Industry Trade cannot be explained by models of comparative advantage. The third section focuses on the empirical and policy aspects of the strate- gic Intra-Industry Trade model. I show that this model is quite useful in deriving industry hypotheses about Intra-Industry Trade, and that recent empirical work using disaggregated industry data has confirmed the predictions of this model. I also demonstrate that a simple theoret- ical extension of the strategic Intra-Industry Trade model provides some new insights on the interrelationship between the degree of product homogeneity and firms' incentives to engage in international collu- sion. Intra-Industry Trade and comparative advantage Background and overview From its first vague formulation at the beginning of the nineteenth century up to very recently, the principal theoretical explanation for the existence of international trade was based on the concept of comparative advantage. Among the different sources of comparative advantage, the Heckscher±Ohlin explanation ± with its emphasis on international differences in factor endowments coupled with factor in- tensity differences among goods ± has played the dominant role in ex- plaining international specialization and trade. Hence, it came as a shock to trade theorists when it was discovered that the trade liberalization patterns during the 1960s and 1970s, especially among the countries of the European Economic Community (EEC), were apparently at odds with the factor endowment predictions of the Heckscher±Ohlin model of international trade.

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  International Trade and Agriculture

  Theories and Practices

  • Won W. Koo, P. Lynn Kennedy(Authors)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Through purchasing goods that it does not produce, each country can increase the variety of goods available for consumption. Gains from trade can occur even though countries may not differ in their endowments of resources or technology. 5 The existence of inter-industry trade is a result of comparative advantage. The comparat- ive advantage of countries is influenced by their endowment of resources and level of tech- nology. These differences result in inter-industry trade. On the other hand, the existence of Intra-Industry Trade is not a result of comparative advantage but occurs as a result of other factors, one of which is the existence of internal economies of scale. 6 As opposed to internal economies, external economies influence the average cost of pro- duction through factors at the level of the industry rather than the firm. This can be seen through the observation that certain industries have tended to develop in clusters. Examples of this include the concentration of the US film industry in Hollywood, the invest- ment banking industry on Wall Street, and the semiconductor industry in Silicon Valley. 7 The forward-falling supply curve resulting from external economies of scale has interest- ing implications for international trade patterns. However, the evolution of an industry within a country is influenced by a variety of factors. We have seen that the productivity of an industry is affected by endowments and technologies, but other factors such as domes- tic policies and circumstance can be major determinants to the development and growth of an industry. External economies of scale can also result in the phenomenon of dynamic increasing returns, also referred to as the learning curve. While the forward-falling supply curve depends on the current level of output, the learning curve is influenced by the total level of knowledge gained as the result of cumulative output.

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  International Trade from Economic and Policy Perspective

  • Vito Bobek(Author)
  • 2012(Publication Date)
  • IntechOpen

    (Publisher)

  Bilateral indices of Intra-Industry Trade in the product class i between country A and all its trading partners are obtained as a weighted average of the bilateral indices [1] for each partner country B, using as weights the share of total trade of A accounted for by trade with B. Bilateral indices of intra industry trade between country A and country B for total manufacturing are the weighted average of the indexes in [1] for all product classes i , with weights given by the share of total trade of i over total manufacturing trade: ( ) ( ) * * 100 ( ) ( ) i i i i i i AB i i i i i i X M X M X M IIT X M X M                                (2) A degree of caution must be used when comparing and interpreting intra-industry indices because their measurement crucially depends on the level of disaggregation chosen for the analysis. In the current context of assessing the importance of the division of the production process across countries, it should be recognized that, as well as measuring trade in intermediate goods at various stages of production, much Intra-Industry Trade is trade in similar, but often highly differentiated, finished products. 4. The extent of Intra-Industry Trade in Thailand’s foreign trade As pointed out in section 3, this study centers on the G-L index measured by the ratio of difference between total trade and net trade expressed in terms of percentages. The estimated G-L indexes, IIT, are reported in Table 7. The G-L indexes, IIT, are calculated by aggregation across all products for Thailand with all AEC member nations and for Thailand with the rest of the world, hereafter referred to as non-AEC member nations. The estimation time span is 1991-2010. About one-fourth of world trade consists of IIT, that is, two-way exchange of goods within standard industrial trade classification (SITC). For advanced industrial nations, IIT plays a large role in trade in manufactured goods which accounts for most of world trade.

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