1. Post–Heckscher-Ohlin Theories of Trade and Intra-Industry Trade
Chapter 10
Post–Heckscher-Ohlin Theories of Trade and Intra-Industry Trade
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
Explain the basis of trade in manufactures beyond Heckscher-Ohlin.
Discuss the roles of technology dissemination, demand patterns, and time in affecting trade.
Demonstrate how the presence of imperfect competition can affect trade.
Describe the phenomenon known as intra-industry trade.

3. Posner’s Imitation Lag Hypothesis
In Posner’s model, there may be a delay in the diffusion of technology between countries.
If a new product is invented in country I, there are two sorts of lags that delay the production the good in country II:
imitation lag, and
demand lag.
During these lags the inventing country will export.

4. The Product Cycle Model
How might comparative advantage change over time? H-O is a static model, and therefore offers little info on this.
The Product Cycle model (Vernon, 1966) follows a product from its invention through its “old age.”
How does it work?

5. The Product Cycle Model: The New Product Phase
A new product is invented in the developed world.
Typically, the new product will be
capital-intensive and labor-saving.
aimed at high-income consumers.
All demand is located in the inventing country.

6. The Product Cycle Model: The New Product Phase
Production is located in the inventing country.
Technological uncertainties make mass production unfeasible.
No trade occurs during this phase.

7. The Product Cycle Prodn, consn Inventing country consumption
Prodn, consn
Inventing country consumption
Inventing country production t0 t1
time
New product phase
10-7

8. The Product Cycle Model: The Maturing Product Phase
The product is increasingly standardized.
Consumers are increasingly aware of the product.
Mass production becomes possible, and economies of scale are realized.
Price steadily drops.
Demand in other developed countries picks up, so inventing country producers export more and more.

9. The Product Cycle Model: The Maturing Product Phase
Later in the maturing product phase, other developed countries begin to produce the product.
Lower transportation costs may give these new entrants an edge in the emerging markets.
Increasingly, output in the inventing country is displaced.

10. Maturing product phase
The Product Cycle
Prodn, consn
Inventing country consumption
exports
Inventing country production t0 t1 t2
time
New product phase
Maturing product phase
10-10

11. The Product Cycle Model: The Standardized Product Phase
Global demand has grown.
Production techniques are well-known and standard.
Competition becomes ever fiercer.
As a result, production shifts mainly to developing countries.

12. The Product Cycle Model: The Standardized Product Phase
Product differentiation may occur, with the inventing country left producing only fancier versions.
The inventing country becomes a net importer.

13. The Product Cycle Prodn, consn Inventing country consumption
Prodn, consn
Inventing country consumption
imports
exports
Inventing country production t0 t1 t2
time
New product phase
Maturing product phase
Standardized product phase
10-13

14. The Product Cycle Theory
Vernon’s Product Cycle theory tells us that comparative advantage is fleeting: we need to perpetually invent new products.

15. Vertical Specialization
Different stages of production process may occur in different countries.
If different parts of the production process vary in terms of capital or labor intensity, the production process may be spread over multiple countries.

16. Firm-Focused Theories
Stage theory: owners and managers learn over time; this implies exporting firms tend to be larger and run by more experienced managers.
Resource-exchange theory: firms internationalize because they cannot generate all resources domestically.
Network theory: networking can compensate for any lack of experience or expertise.

17. The Linder Theory
In the H-O model, the pattern of trade is determined by relative resource endowments.
A model by Linder (1961) focuses mainly on the demand side.
Basic idea is that a country produces stuff to satisfy domestic demand; these goods will be likely exports (and imports, too).

18. The Linder Theory: An Example
Suppose Country I’s income pattern is such that it produces goods A, B, C, D and E.
Let Country I have a relatively low per capita income level.
Suppose these goods are in ascending order of sophistication:
A and B are fairly simple.
C, D, and E are slightly more sophisticated.

19. The Linder Theory: An Example
Suppose Country II has a higher level of per capita income.
It therefore produces goods C, D, and E (just like Country I), but also F and G.
F and G are even more sophisticated.

20. The Linder Theory: An Example
Suppose Country III has an even higher level of per capita income.
It therefore produces good E (just like Country I), F and G (just like country II), but also H and J.
H and J are even more sophisticated.
Let’s look at a diagram of these countries:

21. The Linder Theory: An Example
What products will I and
II trade? I A B C D E
C, D, and E. II C D E F G
III G E F H J
10-21

22. The Linder Theory: An Example
What products will II and
III trade? I A B C D E
E, F, and G. II C D E F G
III G E F H J
10-22

23. The Linder Theory: An Example
What products will I and
III trade? I A B C D E
E only. II C D E F G
III G E F H J
10-23

24. The Linder Theory
So trade will involve goods for which there is overlapping demand.
Implication: trade should be most intense between countries with similar levels of per capita income.

25. The Linder Theory
This theory would explain two things that H-O cannot:
why most trade is between the industrialized countries, which all have (presumably) very similar resource endowments.
why a country might import and export the same product (intra-industry trade).

26. The Linder Theory The theory has been subjected to a barrage of tests.
Sailors, et al. (1973), Thursby and Thursby (1987), and McPherson, Redfearn and Tieslau (2000) and others found evidence to support the Linder theory.
Hoftyzer (1984), Kennedy and McHugh (1983) and others found evidence against the theory.

27. The Krugman Model
Incorporates economies of scale and monopolistic competition.
Consider a graph:
The price of the good relative to the wage (P/W) is on the vertical axis.
Per capita consumption (c) is on the horizontal axis.

28. The Krugman Model Two functions are on the graph:
The PP curve slopes upward, since P/W increases as c increases.
The ZZ curve has a negative slope: as c increases, average cost decreases (due to economies of scale). To maintain the zero-profit condition in monopolistically competitive firms, price must be reduced.

29. The Krugman Model Point E is the initial equilibrium, with the
firm maximizing its
profit, and earning
zero economic profit.
P/W Z P E
(P/W)1 Z P c1 c

30. The Krugman Model Suppose this firm exists in country 1.
Let country 2 be identical to country 1 on both the demand and the supply sides of the economy.
Traditional trade theory posits that these countries would not trade.
However, because trade effectively increases the market size in each country, economies of scale are realized in the Krugman model.
Trade effectively shifts the ZZ curve to the left.

31. The Krugman Model Point E΄ is the new equilibrium; per capita
consumption and P/W
have both decreased as
a result of trade.
P/W Z P Z΄ E
(P/W)1 E΄
(P/W)2 Z P Z΄ c2 c1 c

32. The Krugman Model: The Bottom Line
Although trade causes per capita consumption (c) to fall, total consumption of the firm’s output has risen.
P/W has decreased because of trade; this also means that its reciprocal (W/P) rises.
This suggests that trade causes the real wage of workers to rise.
Even owners of the relatively scarce factor see a rise in real wages, suggesting that the negative income distribution effects of trade may not occur.

33. Other Trade Models
Reciprocal dumping model (Brander and Krugman, 1983)
Because of imperfect competition, intra-industry trade occurs in this model.
Welfare may increase due to increased competition, but may decrease due to waste involved with transporting identical products internationally; the overall welfare effect is unclear.
The gravity model
The focus is on explaining trade volume.
These models illuminate the underlying causes of trade.

34. Intra-Industry Trade Examples: Japan imports and exports computers.
The Netherlands imports and exports beer.
The U.S. imports and exports broccoli.
H-O-S is useless in explaining this - there’s no way a country could export and import the same good.

35. Intra-Industry Trade: Possible Explanations
Product differentiation
Transportation costs
Dynamic economies of scale
Degree of product aggegation
Differing national income distributions
Differing factor endowments and product variety

36. How Common is Intra-Industry Trade?
A recent study by Brülhart attempts to measure IIT in several countries, using an index:
an index value of 0 implies no IIT is taking place.
an index value of 1 implies that a country’s exports in one product category exactly equal its imports.

37. Intra-Industry Trade: Evidence from Brülhart (2009)
Country
SITC 3-digit
Germany
0.570
U.S.
0.503
Japan
0.398
Brazil
0.373
China
0.305
Indonesia
0.291
Bulgaria
0.287
Morocco
0.150
Russian Fed.
0.146
Saudi Arabia
0.070