Inter-industry and intra-industry trade.Heckscher-Ohlin ModelPosted on June 23, 2012 by John Dudovskiy

Differences between inter-industry and intra-industry trade.

International trade is one of the key factors of macroeconomic prosperity for any country.

Today with the increasing force of globalisation international trade has become very

complex with multi-billion transactions taking place every year. Yet, some of the aspects of

international trade are still not fully researched and even existing theories related to the

international trade need to be submitted to critical analysis taking into account

ever-changing global economic environment.

Difference between Inter-industry and Intra-industry trade

Although their wording is very similar the terms ‘inter-industry’ and intra-industry’ trade have a very different meanings.

Inter-industry trade is a trade of products that belong to different industries. For instance, the trade of agricultural

products produced in one country with technological equipment produced in another country can be classified to be an

inter-industry trade. Countries usually engage in inter-industry trade according to their competitive advantages.

Intra-industry trade, on the other hand, is a trade of products that belong to the same industry. As it has been noted,

“intra-industry trade (IIT), that is trade of similar products, has been a key factor in trade growth in recent decades.

These trends have mostly been attributed to the fragmentation of production (outsourcing and offshoring) as a result of

globalisation and new technologies” (Handjiski et al, 2010, p.15).

Explanation of Intra-Industry Trade by Economic Theory

It first sight it may seem strange that countries do engage in importing and exporting same type of products with their

international partners. However, there are a range of benefits intra-industry trade offers businesses and countries

engaging in it in general.

The benefits of intra-industry trade have been explained by various business researchers, and all of these benefits can be

summarised into three points that which is illustrated by Johnson and Taylor (2009) in the following way:

Wyświetl tę stronę w języku: polski Przetłumacz Wyłącz dla języka: angielski Opcje ▼

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

1 z 7 2017-02-22 17:15

Firstly, intra-industry trade increases the variety of products the same industry, which is beneficial to both, businesses,

as well as consumers. This benefit of intra-industry trade is possible because today product range from the same industry

can be highly differentiated, and intra-industry trade will provide the opportunity of having a vast range of differentiated

products within the markets of trading partners.

Secondly, intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use

their comparative advantages. In other words countries will get more economic benefits if they concentrate on producing

specific types of products within specific range, according to their comparative advantages rather than producing all

ranges of specific products.

Thirdly, inter-industry trade stimulates innovation in industry, and can assist the economy in cases of short-term

economic fluctuations.

The main benefit of intra-industry trade can be explained in simple terms by using an example of car trade between

Japan and Germany. Let’s suppose Toyota, a Japanese car company mainly produces family cars, and German car

manufacturer Audi concentrates on producing sport cars. Accordingly, when Toyota produces more family cars, the

lower will be the unit cost, and similarly, more sports cars are produced by Audi, the lower unit price of the car will be.

Heckscher-Ohlin Model and Intra-Industry Trade

Heckscher-Ohlin Model was developed by Eli Heckscher and Bertil Ohlin and offers a general equilibrium approach to

the issues of international trade. The essence of the model can be summarised to the idea that countries will concentrate

on exporting products for the production of which their abundant resources are required, at the same countries try to

import those products for production of which resources required that are scare in respective country (Kemp, 2008).

Ruffin (1999) mentions three fundamental characteristics of Heckscher –Ohlin model of intra-industry trade as

following:

Firstly, each county exports products according to its comparative advantage. For instance, China produces and exports

technology products because the low prices of relevant resources in China provide comparative advantage in producing

and exporting this type of products, while Turkey mainly exports clothing products due to the cheaper prices of cotton

and advanced textile industry present in Turkey.

Secondly, international trade that is based on the comparative advantage will benefit some industries, at the same time

hurting other industries. For example, when UK exports technology abroad, technology companies will benefit; however,

when clothing items are imported into UK, unskilled workers within clothing industry in UK will be hurt.

Thirdly, international trade between countries will result in price equalisation.

To put it simply Heckscher –Ohlin model of intra-industry states that “economies export the services of their abundant

factors and import the services of their scarce factors” (Ruffin, 1999, p.4)

However this theory has attracted criticism due to a set of assumptions it makes. Specifically Heckscher-Ohlin Model

assumes that there is a constant supply of productive factors in the in a country, the points of differences between of

countries are only on factor endowment, and also the theory does not take into account technological progresses.

Nevertheless, apart from the serious shortcomings of Heckscher-Ohlin theory, it still fails to explain intra-industry trade

between countries, because the theory contradicts to the notion of intra-industry trade in fundamental level.

Specifically, Heckscher-Ohlin theory states that countries will engage in exporting those products for the production of

which their abundant resources are going to be used. However, intra-industry trade involves products from the same

industry being traded between countries, compromising the validity of Heckscher-Ohlin theory in today’s economic

environment.

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

2 z 7 2017-02-22 17:15

Conclusion

Intra-industry trade has evolved to be one of the important macro-economic practices that is beneficial in terms of

maintaining macro-economic stability, promoting innovation and increasing the number of differentiated versions of the

same type products in markets of the trading partner countries.

The above and other benefits of intra-industry trade have been explained in economic theory by various authors.

However, Heckscher-Ohlin theory fails to explain intra-industry trade because the theory states that only product

produced with abundant resources are going to be exported, scarce resource products will be imported to a country,

whereas countries engaged in intra-industry trade use the same resources.

The pattern of inter-and intra industry trade within the EU

While trade between countries is can be imports and exports, depending on if the goods are coming into country, or

leaving the country; movement of goods within European Union is referred to as arrivals and dispatches.

The exact definitions of arrivals and dispatches are given in the following way:

“Arrivals are goods in free circulation within the EU which enter the statistical territory of a given Member State.

Dispatches are goods in free circulation within the EU which leave the statistical territory of a given Member State to

enter another Member State” (Eurostat, 2011, online)

The trade within EU from dispatches was calculated to be EUR 2 194 341 million in 2009 (Eurostat, 2011). This amount

is more than double the amount of trade engaged in with non-EU countries. The share of dispatches within EU

compared to exports to countries outside of EU for each country is presented on the following table:

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

3 z 7 2017-02-22 17:15

The importance of the internal market was highlighted by the fact that for each of the Member States, intra-EU trade of

goods was higher exports. The highest shares of intra-EU trade were recorded for the Czech Republic, Slovakia and

Luxembourg, in cases of United Kingdom, Italy, and Malta this number was considerably lower.

We can see that intra-EU trade decreased in 2009 even more significantly compared to the exports. There are many

reasons for this change, and of the main reasons can be pinpointed to be the global economic crisis that started in US in

2007, and within a short period of time extended to all EU member countries as well. Taking into account arrivals and

dispatches together, the biggest decrease in intra-EU trade were observed in cases of Latvia, Lithuania, Estonia and

Finland, where intra-trade has decreased about 30%. This was the reasons why latter countries suffered the most from

the global economic crises of 2007-2010.

In order to analyze performance of any given member of EU, looking at intra-industry trade would not suffice; rather the

trade surplus (extra and intra-EU combined) should be looked at.

Germany was leading in terms of the trade surplus for goods for the year of 2009, at EUR 134 780 million. The next

highest trade surplus in 2009 (EUR 39 244 million) was observed in case of Netherlands, followed by Ireland

(EUR 37 753 million).

However, for the same period some EU members have experienced trade deficit as well. For instance, the highest trade

deficit of EUR 93 189 million was recorded by the United Kingdom, although this was an improvement compared to even

worse performance in 2008.

Implications for Trade Diversion and Trade Creation within EU

Trade creation, as Czinkota et al (2008) inform, is a benefit of economic integration. Specifically, it is a benefit a

particular country obtains as a result of number of countries trading freely among themselves, and creating barriers to

non-members.

Trade diversion, according to Czinkota et al (2008) is a cost of economic integration to a particular country of being a

part of group of countries that trade freely among themselves, but maintain barriers to non-members.

In order to analyse implications of above figures for trade diversion and trade creation within EU, it would be more

efficient approach first to analyse EU from the point of view of Free Trade Area (FTA) or a Union.

Outside a union, and operating independently, countries will attempt to use its comparative advantage In a free trade

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

4 z 7 2017-02-22 17:15

area, on the other hand, countries will trade with other countries they choose, attempting to exploit their comparative

cost advantage by the means of specialisation They will export goods they produce most efficiently, and import goods

from low-cost countries that have exploited their own comparative cost advantage to produce cheap exports. In a

situation where countries form FTA’s such as EU, trade will be vague and the pattern of trade will change. Inefficient

producers may be may be protected and encouraged, at the expense of more efficient imports.

The creation of a customs union, with common external tariffs, will further change the existing pattern of trade flows.

The assumption is that before the union, members imposed differential tariffs on different countries to protect their own

industries.

Once a union is created, members agree to eliminate tariffs between themselves. The effect of this is that, facing lower

priced, zero-tariff, imports from members, consumers increase their demand for these goods, and new trade will be

created.

For example, if Denmark and the UK form a customs union, tariffs on Danish butter must now be reduced, and once they

are completely removed, the free market price of 120p will be highly attractive to UK consumers. UK consumers will now

consume more butter in total because average butter prices will have fallen with the removal of tariffs on Danish butter,

and total demand for butter rises. For example, total output and consumption might increase to 32m kgs (up by 2m),

with UK farmers down from 20m to 15m, New Zealand exports collapsing to just 2m, and Denmark increasing its output

and sales of butter to the UK to 10m (from 5m to 10m).

Furthermore, this will enable a dynamic reaction within Denmark and the UK. Over time, as countries (Denmark and the

UK) become more integrated, increased trade will generate further efficiency gains, such as through the application of

economies of scale. Prices may fall even further, relative to those of non-member countries, and the process of trade

creation continues. For example, with increased sales, Denmark can specialise further in butter production, and produce

on large scale, bringing prices down even further (perhaps nearer to the New Zealand level). Also, the UK can now free

up its resources, and move them out of butter production and into goods and services for which the UK has a

comparative advantages over Denmark. Hence, over time, trade creation will continue as a positive long-term effect of a

customs union.

The major loser in this is the previous trading partner left outside the bloc – less trade now exists between new members

and their old trading partners.

For example, after Denmark and the UK form a customs union, New Zealand, which was the most efficient butter

producer, suffers a loss of sales to the UK, from 5m to 2m, with trade diverted from New Zealand to Denmark. However,

there is some debate about the use of the term trade diversion. In its simplest form it means any trade diverted away

from efficient global producers as a result of the creation of a customs union. Other economists regard trade diversion as

relating to the long-term loss of trade resulting from inefficient producers (such as Denmark, in our hypothetical

example) becoming more efficient following membership of the union. For example, if the price of Danish butter falls

from 120p to 95p as a result of trade expansion within the union, it is now 5p cheaper than New Zealand in the open

market, and more trade may now be diverted away from the formerly highly efficient New Zealand. Whichever definition

is accepted, it is clear that in this case the union has distorted trade.

Within a free trade area many markets and multiple countries are affected by any economic or otherwise changes within

that area. Therefore, to analyze the total effects of a FTA, we need to aggregate the impacts across markets and countries.

Accordingly, each member state of EU has experienced economic disadvantages in the form of trade diversion. A good

example of trade diversion in case of UK would be the import of lamb into the UK. Before UK joined the EU lamb was

imported into the country from New Zealand at a suitable price. However, as a result of UK joining EU France became

the main importer of lamb into UK with much higher price than it was imported from New Zealand. In this was we can

see the economic disadvantage UK had to experience as a result of joining EU.

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

5 z 7 2017-02-22 17:15

The recent enlargement of the European Union (EU) be attributed and the need for the expansion intra-

industry trade within the EU. Explain.

The secondary data research has revealed that recent enlargement EU was undertaken for a variety of reasons, and one

of the main reasons was the need for the expansion of intra-industry trade within EU.

According to analysis by The Centre for Economic Policy Research (2011) one of the main reasons of recent EU

enlargement was to improve the level of intra-industry trade within EU, by trading low-skill and high skill products

within one sector. Moreover, the analysis states that the amount of total intra-industry trade among Singapore, South

Korea, and Taiwan was bigger than the EU before the expansion, and the recent EU enlargement put the Union ahead of

above named countries in terms of the amount of inter-industry trade.

The above statement can be explained in a more simple terms. For instance, if Latvia exports low priced clothes to UK,

the clothes will be the result of work of low-skilled workers working for minimum wages according to EU standard.

Accordingly, when at the same time UK exports clothes to Latvia, these clothes will be highly priced, apparently with

good quality because they would be produced by high-skilled workers in UK.

In the above situation the benefit for UK labour market will be in a way that the demand for skilled workers in UK will

increase, because more clothes need to be produced to export to Latvia and other new members of EU, and at the same

time the demand for low-skilled workers in UK will decrease, due to the fact that cheaper clothes made by low-skilled

workers are already being imported by Latvia and other new members of EU.

Conclusion

This paper has looked at the issues of inter-industry trade within countries from the EU perspective. It has been

identified that partner countries gain significant benefits through engaging intra-industry trade in many levels.

Moreover, it has been also established that EU countries engage intensively in intra-industry trade, however in some

occasions trade diversion may put some countries in disadvantaged positions. Also, the paper has established that one of

the main reasons for EU enlargement was to promote intra-industry trade between member-countries.

References

Handjiski, B, Lucas, R, Martin, P & Guerin, SS, 2010, Enhancing Regional Trade Integration in Southest Europe, World

Bank Publications

EU Enlargement: Implications for East-West Trade, Centre for Economic Policy Research, Available at:

http://www.cepr.org/pubs/bulletin/meets/719.htm

External and intra-EU Trade-Statistical Yearbook, Data 1958-2009, Eurostat Statistical Books

Johnson, D & Turner, C, 2009, International Business: Themes and Issues in the Modern Global Economy, Taylor &

Francis

International Trade in Goods, 2001, Eurostat, Available at: http://epp.eurostat.ec.europa.eu/statistics_explained

/index.php/International_trade_in_goods#Further_Eurostat_information

Kemp, MC, 2008, International Trade Theory: A Critical Review, Routledge

Ruffin, RJ, 1999, The Nature and Significance of Intra-industry Trade, Federal Reserve Bank of Dallas

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

6 z 7 2017-02-22 17:15

This entry was posted in International Business. Bookmark the permalink [http://research-methodology.net/inter-industry-intra-industry-trade-heckscher-ohlin-model/] .

Zwilczona - AdriannaTrzepiota -...23,03 zł 32,90 złAd TaniaKsiazka

Objections to FreeTrade and their...

research-methodology.net

Rope For SaleWholesale

Ad alibaba.com

Personal ReflectionSample on...

research-methodology.net

Logistyka: ŁańcuchDostaw

Ad logistyka łańcuch dostaw

Warner Bros.PESTEL Analysis

research-methodology.net

Carrol's CSR Pyramidand It's Relation to...

research-methodology.net

Role of internationalorganisations in...

research-methodology.net

Inter-industry and intra-industry trade. Heckscher-Ohlin Model http://research-methodology.net/inter-industry-intra-industry-trade-hec...

7 z 7 2017-02-22 17:15