1. Reinert/Windows on the World Economy, 2005 Intra-Industry Trade CHAPTER 4

2. Reinert/Windows on the World Economy, 2005 2 Table 4.1. Two Types of Trade

3. Reinert/Windows on the World Economy, 2005 3 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

4. Reinert/Windows on the World Economy, 2005 4 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

5. Reinert/Windows on the World Economy, 2005 5 Figure 4.1. Markets for Blue and Food-Service Cheese

6. Reinert/Windows on the World Economy, 2005 6 Figure 4.2. US Intra-Industry Trade in Cheese

7. Reinert/Windows on the World Economy, 2005 7 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

8. Reinert/Windows on the World Economy, 2005 8 Figure 4.3. The Gains from Intra-Industry Trade

9. Reinert/Windows on the World Economy, 2005 9 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 doesn’t 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

10. Reinert/Windows on the World Economy, 2005 10 Table 4.2. Trade between the United States and Mexico, 1988

11. Reinert/Windows on the World Economy, 2005 11 Table 4.2. Trade between the United States and Mexico, 1988

12. Reinert/Windows on the World Economy, 2005 12 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

13. Reinert/Windows on the World Economy, 2005 13 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 process—often 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