IntraIndustry Trade

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Intra-Industry Trade

• CHAPTER 4

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Table 4.1. Two Types of Trade
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Two Types of Trade

• Inter-industry trade has its source in
  comparative advantage
• Intra-industry trade source lies in product
  differentiation
• Approximately ¼ 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

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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 4.1
• Trade implications of these supply and demand
  relationships are illustrated in Figure 4.2

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Figure 4.1. Markets for Blue and Food-Service
Cheese
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Figure 4.2. US Intra-Industry Trade in Cheese
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US Intra-Industry Trade in Cheese

• Does intra-industry trade in cheese benefit the
  United States, or is it unnecessary and wasteful?
  
• Take up this issue in Figure 4.3

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Figure 4.3. The Gains from Intra-Industry Trade
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Global Patterns of Intra-Industry Trade

• Intra-industry trade is approximately 70 if we
  consider only trade among the high-income
  countries of the world
• However, intra-industry trade doesnt take place
  exclusively among high-income countries
• Table 4.2 shows trade flows between Mexico and
  United States in 1988
• With the few exceptions of petroleum, nonmetallic
  minerals, and non-electrical machinery, trade was
  balanced

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Table 4.2. Trade between the United States and
Mexico, 1988
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Table 4.2. Trade between the United States and
Mexico, 1988
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Global Patterns of Intra-Industry Trade

• Evidence of increases in intra-industry trade in
  Asia has surfaced
• Appears to be most important among the newly
  industrialized countries (Singapore, Hong Kong,
  and South Korea) and the newly exporting
  countries (Malaysia, Thailand, the Philippines,
  and Indonesia)
• Evidence also exists of increasing intra-industry
  trade between Japan and other Asian countries as
  well as in the trade of China and her major
  trading partners
• Intra-industry trade is a global process that is
  increasing over time

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Global Patterns of Intra-Industry Trade

• The increasing extent of intra-industry trade in
  world trading system has some important
  implications for 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 processoften gives rise to
  calls for protection
• 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