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 In

dustrialized Countries

Chapter 5

Rise of Intra-industry Tradeexchange products which belong to the same sector

Inter-sector Trade

China

USA

Cloth Rice

Cloth Rice

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

020406080

100

Exports Imports Total

USAROW

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 Transformatio

n

Product Cycle Theory

Imperfect competition

Integration Theories about Integration

Free Trade Government Interference

Trade Policy Trade Policy & Trade & Trade BarriersBarriers

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).

: 1 .j j j j j jj

jj j j j j

X M X M X MIITGL

TT X M X M

Chapter 5

GL index (or IIT index)

X M X M X M

IIT=1 IIT=0 IIT=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:

n

iii

n

iii

i

MX

MXB

1

11

Chapter 5

IIT index (or GL index)of selected countries

unit:%

  1988-91 1992-95 96-2000

High and increasing IITCzech Republic n.a 66.3 77.4

Slovak Republic n.a 69.8 76

Mexico 62.5 74.4 73.4

Hungary 54.9 64.3 72.1

Germany 67.1 72 72

United States 63.5 65.3 68.5

Poland 56.4 61.7 62.6

Portugal 52.4 56.3 61.3

High and stable IITFrance 75.9 77.6 77.5

Canada 73.5 74.7 76.2

Austria 71.8 74.3 74.2

UK 70.1 73.1 73.7

Switzerland 69.8 71.8 72

Belgium-Luxembourg 77.6 77.7 71.4

Spain 68.2 72.1 71.2

Netherlands 69.2 70 68.9

Sweden 64.2 64.6 66.6

Denmark 61.6 63.4 64.8

Italy 61.6 64 64.7

Ireland 58.6 57.2 54.6

Finland 53.8 53.2 53.9

Low and increasing IITKorea 41.4 50.6 57.5

Japan 37.6 40.8 47.6

Low and stable IITNew Zealand 37.2 38.4 40.6

Turkey 36.7 36.2 40

Norway 40 37.5 37.1

Greece 42.8 39.5 36.9

Australia 28.6 29.8 29.8

Iceland 19 19.1 20.1

Chapter 5

Increasing importance of intra-industry trade

Intra-industry trade (2-digits)

0

1

1961 1966 1971 1976 1981 1986 1991 1996

Japan

USA

Germany

Chapter 5

Explaining intra-industry trade

love for variety Internationalization of production

Intra-firm trade Reciprocal dumping (economies of

scale) Other explanations

Chapter 5

Love for varieties

Belgium 5 million laborers10,000 varieties

produced, 10,000consumed

Netherlands 7 million laborers14,000 varieties

produced, 14,000consumed

Belgium 5 million laborers10,000 varieties

produced, 24,000consumed

Netherlands 7 million laborers14,000 varieties

produced, 24,000consumed

a. Autarky

b. International trade10,000 varieties;

7/12 th of production

14,000 varieties;5/12 th of production

Chapter 5

Love for varieties

Variety 1A

Variety NA

Variety 2B

Variety 1B

Variety 2A

Variety NB

Consumer country A Consumer country B

.

.

....

Exports from B to A

Exports from A to B

Chapter 5

Intermediate 1A

Intermediate NA

Intermediate 2B

Intermediate 1B

Intermediate 2A

Intermediate NB

Producers country A Producers country B

.

.

....

Exports from B to A

Exports from A to B

Consumers country A Consumers country B

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

ExampleA computer ordered by you at Dell through e-mail 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.Dell imports your computer to the USA in few parts which are easy to assemble at the USA Dell plant.

Chapter 5

ExampleThe 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.

The result is that you have cheap product.

Dell has high profits because they “add value” in the USA, so Dell stock sells like hot cakes.

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 endowmen

ts and demand preference. The basic reasons for this kind of

IIT is economies of scale, we will discuss this topic in details later.

PC

QC

LACc

2

PT

QT

LACT

2

USA & Japan

PC

LACC

2

QC

1.5

Export to Japan

PT

QT

LACT

2

1.5

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.