MODERN INTERNATIONAL TRADE THEORIES CHAPTER 5

Chapter 5 Modern IT Theories New Development of IT (after War II) The relationship of modern IT theories Intra-industry trade Economies of Scale & Imperfect Competition Dynamic theories of IT

Chapter 5 New Development of IT (after war II) Rise of Intra-industry Trade Increase in Trade among Industrialized Countries Increase in Trade among Industrialized Countries

Chapter 5 Rise of Intra-industry Trade exchange products which belong to the same sector Inter-sector Trade China USA ClothRice ClothRice Intra-sector Trade

Chapter 5 Increase in Trade among Industrialized Countries According to classical trade theory,the difference of countries lead to IT;the bigger the difference, the more trade possibility After 60s,the “North-North Trade” exceeded the “North-South Trade”

Chapter 5 North-North Trade From the 60s to the 80s, trade between industrialized countries rose from 45 to 55% of world trade.

Relationship Assumptions of H-O Pure Competition Unchanged Technology Imperfect competition Economies of scale Technology Transformation Product Cycle Theory Imperfect competition IntegrationTheories about Integration Free Trade Government Interference Trade Policy & Trade Barriers Constant return of Scale Economies of Scale Intra-industry trade

Chapter 5 Intra-industry Trade Definition Trade in which a country exports and imports in the same industry In contrast to inter-industry trade. Measurement Explaining intra-industry trade Pattern and gains of IIT Summary for IIT

Chapter 5 Measurement  Economists use the Grubel-Lloyd (GL) index or Intra-industry Trade （ IIT ） index to measure the degree of intra-industry trade in an industry.  X and M respectively represent the export and import value in an industry (or the same kind of products).

Chapter 5 GL index (or IIT index) X M X M X M IIT=1 IIT=0IIT=0.5  IIT index falls between 0 and 1  If a country only export or import this kind of product, IIT ＝ 0, i.e. no intra-industry trade.  If IIT>0 ， it means the country export and import this kind of products at the same time (intra- industry trade).  The larger IIT index is, the more popular the intra-industry trade is. When X=M, IIT=1.

Chapter 5 GL index of a country The intra-industry trade index of a country is:

Chapter 5 IIT index (or GL index) of selected countries unit:%

Chapter 5 Increasing importance of intra-industry trade

Chapter 5 Explaining intra-industry trade love for variety Internationalization of production Intra-firm trade Reciprocal dumping (economies of scale) Reciprocal dumping Other explanations

Chapter 5 Love for varieties

Chapter 5 Love for varieties

Chapter 5 Internationalization of production

Chapter 5 Intra-firm trade INTRA - FIRM TRADE: trade within the same firm but located in different countries. Example: Toyota ships cars or car parts from Toyota Japan to Toyota USA. Still its value is recorded as import of the USA. The US consumers or the government do not make choice about value or quantity of this import. This decision is based on the cost calculation made internally by TOYOTA ( “ global firm ” ).

Chapter 5 Reasons for Intra-firm trade Cheap transportation Fast, internet - based information. Intra-firm pricing ( “ transfer pricing ” ). Development of own distributorships

Chapter 5 Example l A computer ordered by you at Dell through are put into production in four hours in Taiwan and shipped by air to the USA in 12 hours. A computer built to your specification is on your desk in less then three days. The Taiwanese export is an intra-firm trade. l Dell imports your computer to the USA in few parts which are easy to assemble at the USA Dell plant.

Chapter 5 Example l The parts are low priced so the import tariffs on them are very low. The computer is put together in few minutes and Dell “adds value” at home by basically repackaging it before shipping to you. l The result is that you have cheap product. l Dell has high profits because they “add value” in the USA, so Dell stock sells like hot cakes. l Taiwan has jobs.

Chapter 5 Example Low cost intermediate goods - buying through foreign subsidiary may be cheaper. Mexican firms gets assembly parts from Japan and sends TV ’ s to the US under NAFTA rules. Own distributors lowers the markup of independent firms. The transfer price - firms price assembly parts internally below cost to pay lower tariffs and taxes and add value at the fully owned assembly subsidiary.

Chapter 5 Reciprocal Dumping Example Two countries: USA & Japan Two goods: car & truck Identical technology 、 factor endowments and demand preference. The basic reasons for this kind of IIT is economies of scale, we will discuss this topic in details later.

PCPC QCQC LAC c 2 PTPT QTQT LAC T 2 USA & Japan PCPC LAC C 2 QCQC 1.5 Export to Japan PTPT QTQT LAC T Export to USA Trade Autarky

Chapter 5 Other explanations No Puzzle: Pure Categorical Aggregation As an empirical matter, IIT does fall with disaggregation. Seasonal trade, Entreport

Chapter 5 Pattern and Gains of IIT Horizontal IIT vs. Vertical IIT HIIT: intra-industry trade in horizontally differentiated products (products differentiated by attributes) VIIT: intra-industry trade in vertically differentiated products (products differentiated by quality) Gains Economies of scale lead to low costs and low price. Consumers enjoy differentiated products.

Chapter 5 Summary for IIT Trade need not be the result of comparative advantage. Instead, it can result from imperfect competition and increasing returns; Trade may divided into two kinds:intra- industry trade & inter-industry trade; Intra-industry trade benefit producers and consumers.