Chapter 4: Intra-Industry
Trade
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Analytical Elements
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Countries
Sectors
Tasks
Firms
Factors
© 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- Both/and/
industry
same
Both imports and exports Product
in a given sector of the
differentiation
economy at the same
stage of processing.
Vertical intraindustry
Both imports and exports
in a given sector of the
economy at different
stages of processing.
Both/and/
different
© Kenneth A. Reinert, Cambridge University
Press 2012
Fragmentation
(comparative
advantage in
some instances)
Figure 4.1 The Evolution of Intra-Industry Trade at the 5and 3-Digit SITC Levels (percent of total trade)
© Kenneth A. Reinert, Cambridge University
Press 2012
Global Patterns of Intra-Industry Trade
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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
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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
Global Patterns of Intra-Industry Trade
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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
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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
Global Patterns of Intra-Industry Trade
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The adjustment process in the case of intra-industry
trade is very different
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A given sector experiences increases in imports and exports
simultaneously
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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:
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Inter-industry trade:
Vertical intra-industry trade:
Horizontal intra-industry trade:
Low (not at all smooth)
Medium (somewhat smooth)
High (smooth)
© Kenneth A. Reinert, Cambridge University
Press 2012
An Explanation of Intra-Industry Trade
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Will develop an explanation of intra-industry
trade using the example of US trade in cheese
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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
Figure 4.2: Markets for Blue and FoodService Cheese
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 4.3: U.S. Intra-Industry Trade in
Cheese
© Kenneth A. Reinert, Cambridge University
Press 2012
Gains from Intra-Industry Trade
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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
Figure 4.4: The Gains from IntraIndustry Trade
© Kenneth A. Reinert, Cambridge University
Press 2012
Grubel-Lloyd Index
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The Grubel-Lloyd index looks at a given
product category denoted by letter i
It is calculated as:

E Z 
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This index is illustrated in Figure 4.5
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B i  1 
  100
 E i  Z i 
i
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
i
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
Figure 4.5: Visualizing the Grubel-Lloyd
Index
© Kenneth A. Reinert, Cambridge University
Press 2012
The Grubel-Lloyd Index for China
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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
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
20
29
44
1990
36
45
60
1995
38
48
67
2000
39
48
57
2005
42
49
58
© Kenneth A. Reinert, Cambridge University
Press 2012