Chapter 4: Intra-Industry Trade An Introduction to International Economics: New Perspectives on the World Economy © Kenneth A. Reinert, Cambridge University

Chapter 4: Intra-Industry Trade

An Introduction to International Economics: New Perspectives on the World Economy

© Kenneth A. Reinert, Cambridge University Press 2012


Analytical Elements

Countries Sectors Tasks Firms Factors


Table 4.1: Types of Trade

Type of Trade Phrase Meaning Source

Inter-industry Either/or Either imports or exports in a given sector of the economy

Comparative advantage

Horizontal intra-industry

Both/and/same

Both imports and exports in a given sector of the economy at the same stage of processing.

Product differentiation

Vertical intra-industry

Both/and/different

Both imports and exports in a given sector of the economy at different stages of processing.

Fragmentation (comparative advantage in some instances)


Figure 4.1 The Evolution of Intra-Industry Trade at the 5- and 3-Digit SITC Levels (percent of total trade)


Global Patterns of Intra-Industry Trade Approximately one third of world trade takes place as

intra-industry trade Especially prominent in manufactured goods among the

developed or high-income countries of the world Probably accounts for up to 70% of trade

Globally, intra-industry trade is becoming more important over time, particularly in Asia


Global Patterns of Intra-Industry Trade The increasing extent of intra-industry trade in world

trading system has some important implications for the adjustment of economies to increasing trade

Increases in inter-industry trade based on absolute or comparative advantage involve import sectors contracting and export sectors expanding Requires that productive resources, most notably workers, shift

from contracting to expanding sectors in order to avoid unemployment

Not always an easy process—often gives rise to calls for protection


Global Patterns of Intra-Industry Trade The adjustment process in the case of intra-industry

trade is very different A given sector experiences increases in imports and exports

simultaneously Workers are less likely to need to shift between sectors Demands for protection from increased imports are less likely

This is known as the “smooth adjustment hypothesis” Smoothness:

Inter-industry trade: Low (not at all smooth) Vertical intra-industry trade: Medium (somewhat smooth) Horizontal intra-industry trade: High (smooth)


An Explanation of Intra-Industry Trade Will develop an explanation of intra-industry

trade using the example of US trade in cheese Have to allow for product differentiation among types

of cheese Will restrict ourselves to two types of cheese: blue

cheese (denoted by B) and food-service cheese (denoted by F)

This situation is represented in Figure 4.2 Trade implications of these supply and demand

relationships are illustrated in Figure 4.3


Figure 4.2: Markets for Blue and Food-Service Cheese


Figure 4.3: U.S. Intra-Industry Trade in Cheese


Gains from Intra-Industry Trade Does intra-industry trade in cheese benefit

the United States, or is it unnecessary and wasteful?

Take up this issue in Figure 4.4 Areas B and D represent gains from trade


Figure 4.4: The Gains from Intra-Industry Trade


Grubel-Lloyd Index

The Grubel-Lloyd index looks at a given product category denoted by letter i

It is calculated as:

This index is illustrated in Figure 4.5 Pure inter-industry trade is along the axes Pure intra-industry trade is along the 45 degree

diagonal

1001

ii

iii ZE

ZEB


Figure 4.5: Visualizing the Grubel-Lloyd Index


The Grubel-Lloyd Index for China The Grubel-Lloyd Index for China is

presented in Table 4.2 Note as we disaggregate further (moving

from right to left), the amount of intra-industry trade declines but does not disappear

Note that the amount of intra-industry trade increases over time


Table 4.2: Measuring China’s Intra-Industry Trade Using the Grubel-Lloyd Index. Source: Van Marrewijk (2009)Year 3-digit SITC or

237 Sectors2-digit SITC or 237 Sectors

1-digit SITC or 10 Sectors

1980 20 30 63

1985 20 29 44

1990 36 45 60

1995 38 48 67

2000 39 48 57

2005 42 49 58

Documents

Chapter 4: Intra-Industry Trade An Introduction to International Economics: New Perspectives on the World Economy © Kenneth A. Reinert, Cambridge University