Short Essay on Intra-industry Trade of Factor Endowment Theory

In the era of fifties, sixties and seventies trade among the advanced countries grew at a fastest rate and it was in similar but differential manufacturing products.

Intra-industry trade (IIT) connotes two way trade between countries pertaining to the same or similar goods – across horizontally differentiated products such as candy bars, toothpaste, rice, for example, or IIT may take place for the vertically differentiated products – having different characteristics or price satisfying similar wants, for example, automobiles, computers and so on (Benarroch, 2007).

The value 0 implies that there is no intra-industry trade. IIT value 100 implies that all trade in the industry is intra-industry trade. This index is also used to measure for the country as a whole by aggregation.

Intra-industry made implies overlapping trade in a particular commodity. The extents of Intra- industry trade may be measured thus:

According to the H-O model of comparative advantage, by and large, inter-industry trade between nations is attributed to vast factor-endowments and requirements-differentials. It is based on inter-industry focus of specialisation as per the resource capacity. Hence, exports and import may tend to have gross dissimilarities due to differing specialisation focus of inter-industry trade.

It is however, equally true that in the contemporary era, countries also tend to have adapted a narrower form of specialisation in their foreign trade which is referred to as intra-industry trade- implying two-way trade (exporting as well as importing) in the products of the same industry. For

instance, the U.S.A. exports IBM made computers, while it tend to import Toshiba made computers from abroad. Data in Table 6.1 illustrates the measure of intra-industry trade, i.e., two way trade in the automotive industry of the U.S. Economy in 2008.

Factors Causing Intra-industry Trade:

A number of factors can be attributed to the emergence of intra-industry trade such as:

1. Trade in homogenous goods for re-exports. A country may import goods in bulk in order to re-export to other countries. Foreign trade of Hong Kong and Singapore in electronic goods importing from Japan and exporting to Malaysia, Thailand, Indonesia, etc., is of this type.

The area between the two cost ratios determine the region of mutually beneficial trade for the countries.

Actual trade will depend on the relative demand factors for the concerned goods in two countries.

2. Agricultural goods are exported in post-harvest and imported in harvest seasons by a country.

3. Cross-border trade.

4. Differentiated products.

Usually, Intra-industry trade takes place in a very large volume between developed nations possessing similar range of development skill levels, and factor endowments, especially in manufactured goods with a high degree of sophistication and product differentiation whose production function is based on increasing returns to scale, or decreasing costs.

A Case Study:

A case study of IIT index measurement is reported by Benarroch (2007) for selected countries

The GL-IIT index has the following shortcomings.

i. It is biased to the level of aggregation. The value of IIT index tend to be high when the level of industry aggregation is high.

ii. The measure is also biased downwards imbalanced trade.

Reference:

Benarroch, Michael (2007). ‘Economies of Scale, Imperfect Competition and Market Size’ in Kerr W.A. and J.D. Gaisferd (Eds) (2007) Handbook on International Trade Policy, Edward Elgar, Cheltenham.

Case Study: India:

With intensification of economic liberalisation initiatives 1990s onwards, India’s trade has expanded much faster in recent years. Over the years, there is also a change in the pattern of specialisation in the country. This is what is usually captured through the measure of intensity of the intra-industry trade of the country. Data in Table 6.3 represents India’s GL-IIT for the years 1995 and 2000.

It follows that, there has been a positive effect on the process and pattern of industrial specialisation with rationalisation in horizontal and vertical product differentiation under the impact of trade liberalisation and expanding openness of the Indian economy 1995 onwards. This is manifested by the rise in the intensity of GL-IIT indices in the industries such as Chemical, Paper, Gems and Jewellery, Machinery.

Incidentally, Veeramani (2003) has observed that the growth of intra-industry trade of Indian industries in the recent years is attributed to the intra-firm reallocation of productive resources from less efficient to more-efficient product lines under the impact of economic liberalisation in the country. Industry specific factors carry their influence of the different degrees of intensity of IIT in different industries.

By and large, FDI in India tends to the horizontal in nature to augment the supply in domestic markets and competing with the locals. This is because of protective tariff policy of the country. The policy makers should liberalise further and plan out to invite FDI influences such to become more vertical in nature to be more complementary to the Indian industries and export-oriented. Factors such as lack of sufficient infrastructural development, rigidity in labour market reservation policy among others have tended to discourage the vertical FDI influence in India in comparison to other competitive Asian countries.