Chapter 4 IntraIndustry Trade An Introduction to International

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 n n n Countries Sectors Tasks Firms Factors © Kenneth A. Reinert, Cambridge University Press 2012

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- Both/and/ industry same Both imports and exports Product in a given sector of the differentiation economy at the same stage of processing. Vertical intraindustry Both imports and exports in a given sector of the economy at different stages of processing. Both/and/ different © Kenneth A. Reinert, Cambridge University Press 2012 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) © Kenneth A. Reinert, Cambridge University Press 2012

Global Patterns of Intra-Industry Trade n n 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 q n Probably accounts for up to 70% of trade Globally, intra-industry trade is becoming more important over time, particularly in Asia © Kenneth A. Reinert, Cambridge University Press 2012

Global Patterns of Intra-Industry Trade n n 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 q q 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 © Kenneth A. Reinert, Cambridge University Press 2012

Global Patterns of Intra-Industry Trade n The adjustment process in the case of intra-industry trade is very different q A given sector experiences increases in imports and exports simultaneously n n 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: q q q Inter-industry trade: Vertical intra-industry trade: Horizontal intra-industry trade: Low (not at all smooth) Medium (somewhat smooth) High (smooth) © Kenneth A. Reinert, Cambridge University Press 2012

An Explanation of Intra-Industry Trade n Will develop an explanation of intra-industry trade using the example of US trade in cheese q q 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 © Kenneth A. Reinert, Cambridge University Press 2012

Figure 4. 2: Markets for Blue and Food-Service Cheese © Kenneth A. Reinert, Cambridge University Press 2012

Figure 4. 3: U. S. Intra-Industry Trade in Cheese © Kenneth A. Reinert, Cambridge University Press 2012

Gains from Intra-Industry Trade n n n 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 © Kenneth A. Reinert, Cambridge University Press 2012

Figure 4. 4: The Gains from Intra. Industry Trade © Kenneth A. Reinert, Cambridge University Press 2012

Grubel-Lloyd Index n The Grubel-Lloyd index looks at a given product category denoted by letter i It is calculated as: n This index is illustrated in Figure 4. 5 n q q Pure inter-industry trade is along the axes Pure intra-industry trade is along the 45 degree diagonal © Kenneth A. Reinert, Cambridge University Press 2012

Figure 4. 5: Visualizing the Grubel. Lloyd Index © Kenneth A. Reinert, Cambridge University Press 2012

The Grubel-Lloyd Index for China n n n 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 © Kenneth A. Reinert, Cambridge University Press 2012

Table 4. 2: Measuring China’s Intra-Industry Trade Using the Grubel-Lloyd Index. Source: Van Marrewijk (2009) Year 3 -digit SITC or 237 Sectors 2 -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 © Kenneth A. Reinert, Cambridge University Press 2012