For example, when UK exports technology abroad, technology companies will benefit; however, when clothing items are imported into UK, unskilled workers within clothing industry in UK will be hurt. Trade diversion, according to Czinkota et al (2008) is a cost of economic integration to a particular country of being a part of group of countries that trade freely among themselves, but maintain barriers to non-members. According to Nigel Grimwade, "An explanation cannot be found within the framework of classical or neo-classical trade theory. Intra-industry trade refers to the exchange of similar products belonging to the same industry. However, Heckscher-Ohlin theory fails to explain intra-industry trade because the theory states that only product produced with abundant resources are going to be exported, scarce resource products will be imported to a country, whereas countries engaged in intra-industry trade use the same resources. International trade is one of the key factors of macroeconomic prosperity for any country. How does it make us richer? The sources of gains from intra-industry trade between similar economies—namely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scale—do not contradict the earlier theory of comparative advantage. The share of dispatches within EU compared to exports to countries outside of EU for each country is presented on the following table: The importance of the internal market was highlighted by the fact that for each of the Member States, intra-EU trade of goods was higher exports. In the UK over 80% of manufacturing trade was intra-industry trade in the period 1997-2008.4 A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. The essence of the model can be summarised to the idea that countries will concentrate on exporting products for the production of which their abundant resources are required, at the same countries try to import those products for production of which resources required that are scare in respective country (Kemp, 2008). Inter- and Intra-Industry Trade within the European Union Krugman argues that economies specialise to take advantage of increasing returns, not following differences in regional endowments (as contended by neoclassical theory). In particular, trade allows countries to specialize in a limited variety of production and thus reap the advantages of increasing returns (i.e., economies of scale), but without reducing the variety of goods available for consumption. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Accordingly, when at the same time UK exports clothes to Latvia, these clothes will be highly priced, apparently with good quality because they would be produced by high-skilled workers in UK. Whichever definition is accepted, it is clear that in this case the union has distorted trade. For instance, if Latvia exports low priced clothes to UK, the clothes will be the result of work of low-skilled workers working for minimum wages according to EU standard. If the opening (or expansion) of trade is mostly intra-industry, then the impact on the domestic distribution of factor income is relatively minor. Accordingly, when Toyota produces more family cars, the lower will be the unit cost, and similarly, more sports cars are produced by Audi, the lower unit price of the car will be. Answer Now these benefits at the end gets transferred to consumers in form of better-quality products and lower prices. In intra-industry trade, the level of worker productivity is not determined by climate or geography. due to the difficulties of disentangling vertical and horizontal intra-industry trade in the data. As it has been noted, “intra-industry trade (IIT), that is trade of similar products, has been a key factor in trade growth in recent decades. [1] However, this is far from the case. In this was we can see the economic disadvantage UK had to experience as a result of joining EU. intra-industry international trade within the standard international trade classification SITC6, which represents manufactured foods classified chiefly by material. leaning, innovation, and unique skills If a large firm plans to become more competitive in its market space and has already decreased its production costs using economies of scale, what would happen in relation to its intra-industry trade? Europe exported 2.6 million motor vehicles in 2002, and imported 2.2 million of them. Hence, over time, trade creation will continue as a positive long-term effect of a customs union. This paper has looked at the issues of inter-industry trade within countries from the EU perspective. However, there are a range of benefits intra-industry trade offers businesses and countries engaging in it in general. Intra-industry trade refers to the exchange of similar products belonging to the same industry. This was the reasons why latter countries suffered the most from the global economic crises of 2007-2010. For example, after Denmark and the UK form a customs union, New Zealand, which was the most efficient butter producer, suffers a loss of  sales to the UK, from 5m to 2m, with trade diverted from New Zealand to Denmark. A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. While trade between countries is can be imports and exports, depending on if the goods are coming into country, or leaving the country; movement of goods within European Union is referred to as arrivals and dispatches. The intra-industry trade model, on the other hand, emphasizes on the major role the industry features play and on their ability to generate trade operations, not only influence them (Forstner and Balance, 1990, p.160). Intra-industry trade has evolved to be one of the important macro-economic practices that is beneficial in terms of maintaining macro-economic stability, promoting innovation and increasing the number of differentiated versions of the same type products in markets of the trading partner countries. Also, the UK can now free up its resources, and move them out of butter production and into goods and services for which the UK has a comparative advantages over Denmark. the share of IIT in total international trade is growing all the time, at about 4–5% a year. Accordingly, each member state of EU has experienced economic disadvantages in the form of trade diversion. The scope of this paper is limited to processed foods, and includes analytical frameworks from the gravity model, and classic approaches to product differentiation, product commoditization, pricing, and market structure. Specifically Heckscher-Ohlin Model assumes that there is a constant supply of productive factors in the in a country, the points of differences between of countries are only on factor endowment, and also the theory does not take into account technological progresses. This paper develops a dynamic industry model with heterogeneous firms to analyze the intra‐industry effects of international trade. Heckscher-Ohlin Model and Intra-Industry Trade. Intra-industry trade, also known as Horizontal Trade or two-way trade. Trade in Vertically Differentiated Goods. Instead, the level of worker productiv… The traditional model of trade were set out by the model of David Ricardo and the Heckscher–Ohlin model, which tried to explain the occurrence of international trade. The effect of this is that, facing lower priced, zero-tariff, imports from members, consumers increase their demand for these goods, and new trade will be created. In other words countries will get more economic benefits if they concentrate on producing specific types of products within specific range, according to their comparative advantages rather than producing all ranges of specific products. As the scale of output declines, average costs of production increase. Difference between Inter-industry and Intra-industry trade. UK consumers will now consume more butter in total because average butter prices will have fallen with the removal of tariffs on Danish butter, and total demand for butter rises. Inter-industry trade is a trade of products that belong to different industries. [3] It is questioned whether the model applies to IIT at all, as it does not address directly trade between goods of similar factor endowments. Moreover, the analysis states that the amount of total intra-industry trade among Singapore, South Korea, and Taiwan was bigger than the EU before the expansion, and the recent EU enlargement put the Union ahead of above named countries in terms of the amount of inter-industry trade. Secondly, international trade that is based on the comparative advantage will benefit some industries, at the same time hurting other industries. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. For instance, the trade of agricultural products produced in one country with technological equipment produced in another country can be classified to be an inter-industry trade. Heckscher-Ohlin Model was developed by Eli Heckscher and Bertil Ohlin and offers a general equilibrium approach to the issues of international trade. For instance, China produces and exports technology products because the low prices of relevant resources in China provide comparative advantage in producing and exporting this type of products, while Turkey mainly exports clothing products due to the cheaper prices of cotton and advanced textile industry present in Turkey. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of scale. This page was last edited on 7 December 2020, at 23:08. The latter predicts only inter-industry specialisation and trade". The sources of gains from intra-industry trade between similar economies—namely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scale—do not contradict the earlier theory of comparative advantage. [4] He developed the Heckscher-Ohlin-Ricardo model, which showed that even with constant returns to scale that intra-industry trade could still occur under the traditional setting. Instead, they help to broaden the concept. Outside a union, and operating independently, countries will attempt to use its comparative advantage  In a free trade area, on the other hand, countries will trade with other countries they choose, attempting to exploit their comparative cost advantage by the means of specialisation They will export goods they produce most efficiently, and import goods from low-cost countries that  have exploited their own comparative cost advantage to produce cheap exports. It has been identified that partner countries gain significant benefits through engaging intra-industry trade in many levels. As the scale of output goes up, average costs of … The major loser in this is the previous trading partner left outside the bloc – less trade now exists between new members and their old trading partners. Intra-industry trade means trade within the same industry, e.g., steel-for-steel. Explain. Today with the increasing force of globalisation international trade has become very complex with multi-billion transactions taking place every year. The concept of economies of scale , as we introduced in Production, Costs and Industry Structure , means that as the scale of output goes up, average costs of production decline—at least up to a point. Germany was leading in terms of the trade surplus for goods for the year of 2009,  at EUR 134 780 million. Why do countries at the same time import and export the products of the same industry, or import and export the same kinds of goods? Instead, they help to broaden the concept. Interpretivism (interpretivist) Research Philosophy, Handjiski, B, Lucas, R, Martin, P & Guerin, SS, 2010, Enhancing Regional Trade Integration in Southest Europe, World Bank Publications, EU Enlargement: Implications for East-West Trade, Centre for Economic Policy Research, Available at: http://www.cepr.org/pubs/bulletin/meets/719.htm, External and intra-EU Trade-Statistical Yearbook, Data 1958-2009, Eurostat Statistical Books, Johnson, D & Turner, C, 2009, International Business: Themes and Issues in the Modern Global Economy, Taylor & Francis, International Trade in Goods, 2001, Eurostat, Available at: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_trade_in_goods#Further_Eurostat_information, Kemp, MC, 2008, International Trade Theory: A Critical Review, Routledge, Ruffin, RJ, 1999, The Nature and Significance of Intra-industry Trade, Federal Reserve Bank of Dallas. Once a union is created, members agree to eliminate tariffs between themselves. In its simplest form it means any trade diverted away from efficient global producers as a result of the creation of a customs union. Therefore, to analyze the total effects of a FTA, we need to aggregate the impacts across markets and countries. Various indexes of IIT have been created, including the Grubel–Lloyd index, the Balassa index, the Aquino index, the Bergstrand index and the Glesjer index. Thirdly, inter-industry trade stimulates innovation in industry, and can assist the economy in cases of short-term economic fluctuations. "The Role of Intra-Industry Trade in the Service Sector", in Michael Plummer (ed. Trade in Horizontally Differentiated Goods. Moreover, it has been also established that EU countries engage intensively in intra-industry trade, however in some occasions trade diversion may put some countries in disadvantaged positions. Suppose, for the sake of argument, that we focus on the sector “cars”. Select the correct answer below: As the scale of output remains steady, average costs of production increase. The Prevalence of Intra-industry Trade between Similar Economies. Yet, Donald Davis believed that both the Heckscher–Ohlin and Ricardian models were still relevant in explaining intra-industry trade. Furthermore, this will enable a dynamic reaction within Denmark and the UK. The above and other benefits of intra-industry trade have been explained in economic theory by various authors. The next highest trade surplus in 2009 (EUR 39 244 million) was observed in case of Netherlands, followed by Ireland (EUR 37 753 million). The main benefit of intra-industry trade can be explained in simple terms by using an example of car trade between  Japan and Germany. AfCFTA will boost intra-African trade by immediately removing all tariffs on 90 percent of goods. Thus, more and more, countries are importing the same kinds of products they are also exporting. All this suggests that the intra-African trade benefits of AfCFTA will neither be as imminent nor as large as suggested by the widely-cited 52.3% figure. There are three types of intra-industry trade, Although the theory and measurement of intra-industry trade initially focused on trade in goods, especially industrial products, it has also been observed that there is substantial intra-industry trade in the international trade of services.[5]. Another potential explanation is provided by Flavey & Kierzkowski (1987). He was speaking at the commissioning and handing over of the AfCFTA Secretariat building in Accra on Monday August 17, 2020. To put it simply Heckscher –Ohlin model of intra-industry states that “economies export the services of their abundant factors and import the services of their scarce factors” (Ruffin, 1999, p.4). Intra-industry trade among the … In other words countries will get more economic benefits if they concentrate on producing specific types of products within specific range, according to their comparative advantages rather than producing all ranges of specific products. Countries usually engage in inter-industry trade according to their competitive advantages. In order to analyze performance of any given member of EU, looking at intra-industry trade would not suffice; rather the trade surplus (extra and intra-EU combined) should be looked at. provided access to cheaper imports for consumers and households who now benefit from lower prices and increased choice. International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services.. Inefficient producers may be may be protected and encouraged, at the expense of more efficient imports. There are a number of possible advantages of intra-industry trade. Research suggests that, "Intra-industry trade has been considered in international trade literature as the explanation of the unexpectedly large expansion of industrial trade among OECD countries, for which it represented more than two-thirds of their total international trade by the beginning of the seventies. IIT is not simply a fiction or artifact produced by statistical classifications and definitions, but very much a reality. "[6], Shelburne, Robert C. ; Gonzales, Jorge (2004). Japan exported 4.7 million vehicles in 2002 (1 million of which went to Europe, and 2 million to North America), and imported 0.3 million. Nevertheless, apart from the serious shortcomings of Heckscher-Ohlin theory, it still fails to explain intra-industry trade between countries, because the theory contradicts to the notion of intra-industry trade in fundamental level. It is not even determined by the general level of education or skill. The concept of economies of scale, as we introduced in Production, Costs and Industry Structure, means that as the scale of output goes up, average costs of production decline—at least up to a point. Over time, as countries (Denmark and the UK) become more integrated, increased trade will generate further efficiency gains, such as through the application of economies of scale. Their model showed that on the demand side goods are distinguished by the perceived quality of that good and high quality goods are produced under conditions of high capital intensity. However, evidence shows that even when industries are disaggregated to extremely fine levels IIT still occurs, so this argument can be ignored. Ruffin (1999) mentions three fundamental characteristics of Heckscher –Ohlin model of intra-industry trade as following: Firstly, each county exports products according to its comparative advantage. 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