Question

Differentiate between inter –industry and intra -industry trade and discuss why an increasing proportion of world trade today involves the exchange of differentiated products. (250 words)

Answer 1

International trade is one of the key factors of macroeconomic prosperity for any country. Today with the increasing force of globalisation international trade has become very complex with multi-billion transactions taking place every year. Yet, some of the aspects of international trade are still not fully researched and even existing theories related to the international trade need to be submitted to critical analysis taking into account ever-changing global economic environment.

Although their wording is very similar the terms ‘inter-industry’ and intra-industry’ trade have a very different meanings.

Inter-industry trade is a trade of products that belong to different industries. 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. Countries usually engage in inter-industry trade according to their competitive advantages.

Intra-industry trade, on the other hand, is a trade of products that belong to the same industry. 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. These trends have mostly been attributed to the fragmentation of production (outsourcing and offshoring) as a result of globalisation and new technologies” (Handjiski et al, 2010, p.15).

It first sight it may seem strange that countries do engage in importing and exporting same type of products with their international partners. However, there are a range of benefits intra-industry trade offers businesses and countries engaging in it in general.

The benefits of intra-industry trade have been explained by various business researchers, and all of these benefits can be summarised into three points that which is illustrated by Johnson and Taylor (2009) in the following way:

Firstly, intra-industry trade increases the variety of products the same industry, which is beneficial to both, businesses, as well as consumers. This benefit of intra-industry trade is possible because today product range from the same industry can be highly differentiated, and intra-industry trade will provide the opportunity of having a vast range of differentiated products within the markets of trading partners.

Secondly, intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages. 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.

Thirdly, inter-industry trade stimulates innovation in industry, and can assist the economy in cases of short-term economic fluctuations.The main benefit of intra-industry trade can be explained in simple terms by using an example of car trade between Japan and Germany. Let’s suppose Toyota, a Japanese car company mainly produces family cars, and German car manufacturer Audi concentrates on producing sport cars. 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.

Heckscher-Ohlin Model and Intra-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. 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).

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. 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.

Secondly, international trade that is based on the comparative advantage will benefit some industries, at the same time hurting other industries. 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.