INTRA-INDUSTRY TRADE

Also by P. K. M. Tharakan

ADJUSTEMENTS STRUCTURELS ET INDUSTRIES DU JUTE: THEORIES de la PRODUCTION (with J. De Bandt and St. MacDowall) IMPERFECT COMPETITION AND INTERNATIONAL TRADE

(co-edited with David Greenaway) INTRA-INDUSTRY TRADE: Empirical and Methodological Aspects MULTINATIONAL COMPANIES AND A NEW INTERNATIONAL DIVI­

SION OF LABOUR COMPETITIVENESS OF EUROPEAN INDUSTRY (co-edited with A. Francis)

Also by Jacob Kol

EUROPEAN TRADE POLICIES AND THE DEVELOPING WORLD (co-edited with L. B. M. Mennes)

Intra-Industry Trade Theory, Evidence and Extensions

Edited by P. K. M. Tharakan Professor, Department of Economics University of Antwerp

and Jacob Kol Senior Lecturer, Department of Economics Erasmus University, Rotterdam

Palgrave Macmillan

ISBN 978-1-349-10466-6 ISBN 978-1-349-10464-2 (eBook) DOI 10.1007/978-1-349-10464-2

© P. K. M. Tharakan and Jaeob Kol, 1989

Softeover reprint ofthe hardcover 1st edition 1989

All rights reserved. For information, write: Seholarly and Referenee Division, St. Martin's Press, Ine., 175 Fifth Avenue, New York, N.Y. 10010

First published in the United States of Ameriea in 1989

ISBN 978-0-312-02771-1

Library of Congress Cataloging-in-Publieation Data Intra-industry trade. 1. International trade. I. Tharakan, P. K. Mathew. 11. Kol, J. HF1379.I585 1989 382 88-29715 ISBN 978-0-312-02771-1

Contents

List of Figures viii

~~ru~ ~

Notes on the Contributors x

Preface xiii

List of Abbreviations xv

1 Intra-Industry Trade, Traditional Trade Theory and its Extensions Jacob Kol and P. K. M. Tharakan 1

1.1 Intra-industry trade and tradition al trade theory 1 1.2 Expanding the scope of intra-industry trade 10

2 Reflections on Intra-Industry Trade Theory and Factor Proportions P. J. Lloyd 15

2.1 Is intra-industry trade real? 15 2.2 The concept of industry revisited 19 2.3 Continuum models of intra-industry trade 22 2.4 Some final observations 29

3 Comparative Costs and Elasticities of Substitution as Determinants of Inter- and Intra-Industry Trade Pär Hansson and Lars Lundberg 31

3.1 Introduction 31 3.2 The model 32 3.3 Testing 38 3.4 Summary and conclusions 45 Appendix 3.1 Factor intensity, relative costs

and prices 46 Appendix 3.2 The elasticity of substitution and

the share of intra-industry trade 48

v

vi Contents

4 Allyn Young Specialisation and Intermediate Goods in Intra-Industry Trade Jacob Kol and Paul Rayment 51

4.1 Introduction 51 4.2 Intermediate goods in international trade 52 4.3 Allyn Y oung specialisation 55 4.4 Intermediates and intra-industry trade 61 4.5 Overview 65 Appendix 4.1 Types of intra-industry exchange in

Netherlands' trade in furniture 66

5 Bilateral Intra-Industry Trade between Countries with Different Factor Endowment Patterns P. K. M. Tharakan 69

5.1 Introduction 69 5.2 Review of the current stock of knowledge 70 5.3 The sampie used in the empirical analysis 75 5.4 Empirical analysis of bilateral intra-industry trade

at disaggregative levels 76 5.5 Concluding remarks 85 Appendix 5.1 Overview of re cent models of intra-industry

trade 87

6 Intra-Industry Trade in Transportation Services Henryk Kierzkowski 92

6.1 Introduction 92 6.2 Stylised facts 93 6.3 Modelling international transportation 96 6.4 Empirical results 109 6.5 Conclusions 115 Appendix 6.1 Derivation of the data base 116 Appendix 6.2 Derivation of quantities of transportation

services provided 117

7 An Empirical Analysis of Intra-Industry Trade and Multinational Firms Elizabeth Wickham and Henry Thompson 121

7.1 Introduction 121 7.2 Intra-industry trade model 122

Contents vii

7.3 Empirical procedure 129 7.4 Empirical results 131 7.5 Conclusion 136 Appendix 7.1 Detailed results of the regression analysis 137

8 Elfective Protection Analysis and Optimal Trade Policy with Intra-Industry Specialisation and Imperfect Competition David Greenaway and Chris Mi/ner 145

8.1 Introduction 145 8.2 Modelling effective protection under inter- and

intra-industry specialisation 146 8.3 Optimal effective protection with intra-industry

specialisation 151 8.4 Tariffs on inputs and outputs under imperfeet

competition: some further possibilities 155 8.5 Conclusions 161

Notes and References

Bibliography

Author Index

Subject Index

163

175

184

186

List of Figures

3.1 Unit costs and factor prices in a two-factor, multi-sector model 33

3.2 Relative prices and the distribution of demand between products from A and B 36

3.3 Determinants of the share of intra-industry trade 41 3.4 The effects of factor price equalisation on relative

unit cost 44 3.5 The effect of changing relative costs and prices on

the distribution of demand and trade 45 6.1 Imports of transportation services in the duopoly

model 101 6.2 Exports of transportation services in the duopoly

model 106 7.1 Share of intra-industry trade in the total trade 123 8.1 Vertical specialisation and effective protection 148 8.2 Horizontal specialisation and effective protection 150 8.3 International market power, intra-industry trade and

effective protection 155

viii

List of Tables 3.1 Regression coefficients (elasticities) for the

determinants of the share of intra-ind'ustry trade across industries 43

4.1 Commodity composition of world trade in manufactures 53

4.2 Trade classification and broad economic categories 54 4.3 Broad economic categories in trade of the EC,

USA and Japan 54 4A.1 Netherlands' trade with Switzerland, 1983 66 4A.2 Calculation of types of exchange 67 5.1 Products which recorded high values (>50) of the

Grubel and Lloyd Index of intra-industry trade of the developed market economy countries with the developing world in 1982 75

5.2 Cases of high bilateral intra-industry trade at SITC 5-digit level between the European countries and the developing countries in 1982 77

5A.1 Main features of the recent models of intra-industry trade 87

6.1 International transportation in relation to merchandise trade 94

6.2 Statistical asymmetry on shipment and other transportation payments 95

6.3 Regression coefficients for exports of transportation services 111

6.4 Regression coefficients for imports of transport at ion services 114

7.1 Expected signs 132 7A.1 Regions Ro, R1 and R2 combined; estimated

coefficients (t-values) 137 7A.2 Region Ro 138 7A.3 Region R 1 139 7A.4 Region R 1 with 2000 < DIF< 3000 140 7A.5 Region R 1 with 3000 < DIF < 4000 141 7A.6 Region R 1 with 4000 < DIF < 6000 142 7A.7 Region R 1 with 6000 < DIF < 8000 143 7A.8 Region R2 144

ix

Notes on the Contributors

David Greenaway is Professor of Economics and Head of the Depart­ment of Economics at the University of Nottingham. He has held visiting posts at the Graduate Institute of International Studies, Geneva (1981) and Lehigh University, Pennsylvania (1982, 1987). He has authored, co-authored, edited and co-edited various books including International Trade Policy; Current Issues in International Trade; The Economics of Intra-Industry Trade, and Economic Devel­opment and International Trade. He has published extensively in professional journals including Economic Journal, European Econ­omic Review Weltwirtschaftliches Archiv.

Pär Hansson is currently working on his doctoral thesis on intra­industry trade in the Department of Economics of the Swedish University of Agricultural Sciences, Umea, Sweden. His papers on intra-industry trade have appeared in Imperfect Competition and International Trade (edited by Greenaway and Tharakan) and Nordic Studies on Intra-Industry Trade (edited by Andersson).

Henryk Kierzkowski is Professor of Economics, Graduate Institute for International Studies, Geneva. He has published extensivelyon issues regarding international trade. His publications include the edited volumes: Monopolistic Competition and International Trade; Protection and International Trade: Essays in Honour of W. M. Corden, and articles in a number of specialised journals.

Jacob Kol is Senior Lecturer at Erasmus University, Rotterdam, and has recently completed his doctoral thesis on measuring intra-industry trade. His publications in the field of international trade include European Trade Policies and the Developing World (co-edited with L. B. M. Mennes) and articles in specialised journals such as Econ­omie Appliquee; European Economic Review and the Journal of International Economics.

P. J. LIoyd is Professor of Economics and Dean of the Faculty of Economics and Commerce at the University of Melbourne, Austra­lia. His principal research interests are in international trade and

x

Notes on the Contributors xi

microeconomics. He has published many articles in the leading professional journals and is the author of several books. The book he co-authored with H. G. Grubel in 1975 entitled Intra-Industry Trade has remained the standard reference work in this field.

Lars Lundberg is Research Fellow at the Trade Union Institute for Economic Research, Stockholm. His research interests are interna­tional trade, industrial structural change and trade policy. He has published books and articles on growth and capital formation and trade-related questions. His papers on intra-industry trade have appeared in Weltwirtschaftliches Archiv, Intra-Industry Trade: Em­pirical and Methodological Aspects (edited by Tharakan) and Imper­fect Competition and International Trade (edited by Greenaway and Tharakan).

Chris Milner is Senior Lecturer in Economics at Loughborough University. He is editor of International Money and Political Econ­omy and co-authored (with Greenaway) The Economics of Intra­Industry Trade. His articles have appeared in a number of journals including Economic Journal; European Economic Review, and Welt­wirtschaftliches Archiv.

Paul Rayment is a Senior Economist with the United Nations Econ­omic Commission for Europe, Geneva, where he is head of market economies research in the General Economic Analysis Division. His non-official work has been published in a number of academic jour­nals including the Economic Record, the Oxford Bulletin of Eco­nomics and Statistics, Economia Internazionale, etc. An earlier essay on intra-industry trade appeared in Controlling Industrial Economies - Essays in Honour ofe. T. Saunders (edited by Stephen F. Frowen).

P. K. M. Tharakan is Professor of Economics at the University of Antwerp. He has held visiting posts at the Catholic University of Leuven (1985), Jayawardenepura University, Sri Lanka (1982), Insti­tute for International Economic Studies, University of Stockholm, Sweden (1979) and National Institute for Bank Management, Bom­bay (1975). His publications include Multinational Companies and a New International Division of Labour; Intra-Industry Trade: Empiri­cal and Methodological Aspects; Imperfect Competition and Interna­tional Trade (co-edited with Greenaway) and articles in professional

XlI Notes on the Contributors

journals such as Cahiers Economiques de Louvain; European Eco­nomic Review, and Weltwirtschaftliches Archiv.

Henry Thompson is Assistant Professor at Auburn University. His current research is in general equilibrium trade theory and his articles have been published in various economic journals such as Keio Economic Studies; European Economic Review, and Canadian Eco­nomic Journal.

Elizabeth Wickham is Professor in the Department of Economics at the University of North Carolina at Chapel Hill. Her current research involves measuring product differentiation in intra-industry trade models and the role on non-homothetic production biases in these models. She has published in professional economic journals such as Economic Inquiry.

Preface

Intra-industry trade analysis has emerged as a new frontier in inter­national economics in recent years. Professor Verdoorn's (1960) finding that specialisation and exchange subsequent to the formation of the Benelux customs union took place within rather than between different categories of products, thus suggesting a trend towards intra-industry, rather than inter-industry trade, did not immediately attract the kj.nd of widespread attention which the 'Leontief paradox' (1953) had done a few years earlier. But as the remarkable develop­ments in the international trade theory gathered momentum in the 1960s and 1970s, the link between the phenomenon of intra-industry trade and the imperfect competition analysis of international trade became more explicit. In the process, substantial progress was achieved in modelling crucial variables such as scale economies and preference diversity in a general equilibrium framework. The fact that intra-industry trade is associated with a variety of market struc­tures has led to a quantum leap in the number of models 'generating' alternative situations in which simultaneous imports and exports of products which are very dose substitutes (or even identical) in consumption and input use can take place.

If these developments have led to a sea change in our perception of the determinants of the commodity composition of international trade, the process of reconciling the new findings with the conven­tional wisdom has not been always a smooth one. Some staunch defenders of orthodoxy have sometimes unwisely dismissed intra­industry trade as a statistical artefact. The proponents of the intra­industry trade have been certainly less abrasive. But many of the new models of imperfect competition simply do not have the powerful normative properties of the Heckscher-Ohlin-Samuelson theory.

The various chapters contained in this volume can be conveniently grouped together into two parts. The first part, i.e. chapters 2-5, have the common theme that the theoretical underpinnings of intra­industry trade analysis and the Heckscher-Ohlin-Samuelson ap­proach can be regarded as complementary rather than contradictory. The second part consisting of chapters 6-8 explores further exten­sions in the field of intra-industry trade. The contents of the last mentioned chapters deal respectively with intra-industry trade in

xiii

xiv Preface

international transportation services, the role of multinational firms in intra-industry trade and the positive and normative aspects of effective protection in a setting of intra-industry trade specialisation.

A number of papers contained in this volume were presented originally to a symposium on intra-industry trade held at the Euro­pean Institute for Advanced Studies in Management (EIASM) in Brussels in May 1986. These were complemented by a number of specially commissioned papers. It is our ho pe that the resulting blend will constitute another step in developing a synthesis of the tra­ditional trade theory and the intra-industry trade analysis as weil as an extension of the scope of the latter.

We would like to take this opportunity to express our thanks to all the contributors for their cooperation and understanding especially in carrying out the revisions. We are also grateful to Mr T. M. Farmiloe and Ms S. Roberts-West at the publishers for their help and encour­agement and to Mrs Elizabeth Black and Mr Keith Povey for a thorough copy-editing. Finally, we would like to acknowledge the valuable secretarial help extended to us by Hennie Biekart, Bart Kuijpers and C. J. van Opijnen of Erasmus University, Christiane Merckaert of EIASM and Hugo de Craen of Antwerp University.

P. K. M. THARAKAN

JACOB KOL

List of Abbreviations

BTN DC DME EIASM

GSP IIT ISIC MNE n.e.s. NIC OLS R&D SDR SEE SITC

Brussels Tariff Nomenclature developed countries developed market economies European Institute for Advanced Studies in Management Generalised System of Preferences intra-industry trade International Standard Industrial Classification multinational enterprise not elsewhere specified newly industrialised country ordinary least squares research and development Special Drawing Right standard error of estimation Standard International Trade Classification

xv