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
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-
industry
Both/and/
same
Both imports and exports
in a given sector of the
economy at the same
stage of processing.
Product
differentiation
Vertical intra-
industry
Both/and/
different
Both imports and exports
in a given sector of the
economy at different
stages of processing.

Fragmentation
(comparative
advantage in
some instances)
A. Reinert, CambridgKenneth e University
Press 2012
Figure 4.1 The Evolution of Intra-Industry Trade at the 5-
and 3-Digit SITC Levels (percent of total trade)

Kenneth A. Reinert, Cambridge University
Press 2012
Global Patterns of Intra-Industry Trade
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
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
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
Requires that productive resources, most notably workers, shift
from contracting to expanding sectors in order to avoid
unemployment
Not always an easy processoften gives rise to calls for
protection

Kenneth A. Reinert, Cambridge University
Press 2012
Global Patterns of Intra-Industry Trade
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
This is known as the smooth adjustment hypothesis
Smoothness:
Inter-industry trade: Low (not at all smooth)
Vertical intra-industry trade: Medium (somewhat smooth)
Horizontal intra-industry trade: High (smooth)
Kenneth A. Reinert, Cambridge University
Press 2012
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 4.2
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 Food-
Service 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
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 Intra-
Industry Trade
Kenneth A. Reinert, Cambridge University
Press 2012
Grubel-Lloyd Index
The Grubel-Lloyd index looks at a given
product category denoted by letter i
It is calculated as:

This index is illustrated in Figure 4.5
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
( )
100 1
(

=
i i
i i
i
Z E
Z E
B
Figure 4.5: Visualizing the Grubel-Lloyd
Index
Kenneth A. Reinert, Cambridge University
Press 2012
The Grubel-Lloyd Index for China
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 Chinas 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