1. Chapter 4: Intra-Industry Trade
An Introduction to International Economics: New Perspectives on the World Economy
© Kenneth A. Reinert, Cambridge University Press 2012

2. © Kenneth A. Reinert, Cambridge University Press 2012
Analytical Elements
Countries
Sectors
Tasks
Firms
Factors
© Kenneth A. Reinert, Cambridge University Press 2012

3. © 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-industry
Both/and/
same
Both imports and exports in a given sector of the economy at the same stage of processing.
Product differentiation
Vertical intra-industry
different
Both imports and exports in a given sector of the economy at different stages of processing.
Fragmentation (comparative advantage in some instances)
© Kenneth A. Reinert, Cambridge University Press 2012

4. © Kenneth A. Reinert, Cambridge University Press 2012
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

5. Global Patterns of Intra-Industry Trade
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
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

6. Global Patterns of Intra-Industry Trade
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
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

7. Global Patterns of Intra-Industry Trade
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
This is known as the “smooth adjustment hypothesis”
Smoothness:
Inter-industry trade: Low (not at all smooth)
Vertical intra-industry trade: Medium (somewhat smooth)
Horizontal intra-industry trade: High (smooth)
© Kenneth A. Reinert, Cambridge University Press 2012

8. 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 4.2
Trade implications of these supply and demand relationships are illustrated in Figure 4.3
© Kenneth A. Reinert, Cambridge University Press 2012

9. Figure 4.2: Markets for Blue and Food-Service Cheese
© Kenneth A. Reinert, Cambridge University Press 2012

10. Figure 4.3: U.S. Intra-Industry Trade in Cheese
© Kenneth A. Reinert, Cambridge University Press 2012

11. Gains from Intra-Industry Trade
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

12. Figure 4.4: The Gains from Intra-Industry Trade
© Kenneth A. Reinert, Cambridge University Press 2012

13. © Kenneth A. Reinert, Cambridge University Press 2012
Grubel-Lloyd Index
The Grubel-Lloyd index looks at a given product category denoted by letter i
It is calculated as:
This index is illustrated in Figure 4.5
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

14. Figure 4.5: Visualizing the Grubel-Lloyd Index
© Kenneth A. Reinert, Cambridge University Press 2012

15. The Grubel-Lloyd Index for China
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

16. © 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 29 44
1990 36 45 60
1995 38 48 67
2000 39 57
2005 42 49 58
© Kenneth A. Reinert, Cambridge University Press 2012