However, there is some debate about the use of the term trade diversion. The debate on the benefits of trade has dominated this decade, and Africa has cast its vote for more and better trade with itself. The above and other benefits of intra-industry trade have been explained in economic theory by various authors. 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 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. Secondly, international trade that is based on the comparative advantage will benefit some industries, at the same time hurting other industries. 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. Initially comparative advantage was taken as a wider concept but intra-industry trade simplified the product more by breaking them into process and then taking advantage of comparative advantage. World Economy Intra-industry trade Intra-industry trade arises if a country simultaneously imports and exports similar types of goods or services. 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). It is not even determined by the general level of education or skill. There are many reasons for this change, and of the main reasons can be pinpointed to be the global economic crisis that started in US in 2007, and within a short period of time extended to all EU member countries as well. He was speaking at the commissioning and handing over of the AfCFTA Secretariat building in Accra on Monday August 17, 2020. Intra-industry trade refers to the exchange of similar products belonging to the same industry. Heckscher-Ohlin Model was developed by Eli Heckscher and Bertil Ohlin and offers a general equilibrium approach to the issues of international trade. Trade creation, as Czinkota et al (2008) inform, is a benefit of economic integration. 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 creation of a customs union, with common external tariffs, will further change the existing pattern of trade flows. 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. It first sight it may seem strange that countries do engage in importing and exporting same type of products with their international partners. The term is usually applied to international trade, where the same types of goods or services are both imported and exported. In order to analyse implications of above figures for trade diversion and trade creation within EU, it would be more efficient approach first to analyse EU from the point of view of Free Trade Area (FTA) or a Union. For instance, the highest trade deficit of EUR 93 189 million was recorded by the United Kingdom, although this was an improvement compared to even worse performance in 2008. Krugman argues that economies specialise to take advantage of increasing returns, not following differences in regional endowments (as contended by neoclassical theory). What is the benefit of economies of scale in intra-industry trade? When trade commences, this labour-surplus country expands the production of cloth (L- good) and reduces the production of steel (K-good). Instead, the level of worker productivity is determined by how firms engage in specific learning about specialized products, including taking advantage of economies of scale. The Prevalence of Intra-industry Trade between Similar Economies. 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. 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? "The Role of Intra-Industry Trade in the Service Sector", in Michael Plummer (ed. 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. Both nations can take advantage of extreme specialization and learning in certain kinds of cars with certain traits, like gas-efficient cars, luxury cars, sport-utility vehicles, higher- and lower-quality cars, and so on. The latter predicts only inter-industry specialisation and trade". We delimit the same type here according to the Standard International Trade Classification (SITC) which has at least 3 same digits in SITC. Answer Now these benefits at the end gets transferred to consumers in form of better-quality products and lower prices. 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. Intra-industry trade (i.e. Do consumers benefit from intra-industry trade? Thirdly, international trade between countries will result in price equalisation. This amount is more than double the amount of trade engaged in with non-EU countries. [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. Increases in intra-regional trade as a consequence of the CEFTA agreement could spur the production of value-added goods, through the creation of vertically integrated value chains. 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. 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. Furthermore, this will enable a dynamic reaction within Denmark and the UK. However this theory has attracted criticism due to a set of assumptions it makes. 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? 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. Countries usually engage in inter-industry trade according to their competitive advantages. However, intra-industry trade involves products from the same industry being traded between countries, compromising the validity of Heckscher-Ohlin theory in today’s economic environment. In its simplest form it means any trade diverted away from efficient global producers as a result of the creation of a customs union. the share of IIT in total international trade is growing all the time, at about 4–5% a year. Secondly, intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages. Intra-industry trade, also known as Horizontal Trade or two-way trade. The main benefit of intra-industry trade can be explained in simple terms by using an example of car trade between  Japan and Germany. In this was we can see the economic disadvantage UK had to experience as a result of joining EU. 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. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Taking into account arrivals and dispatches together, the biggest decrease in intra-EU trade were observed in cases of  Latvia, Lithuania, Estonia and Finland, where intra-trade has decreased about 30%. International trade is one of the key factors of macroeconomic prosperity for any country. The recent enlargement of the European Union (EU) be attributed and the need for the expansion intra-industry trade within the EU. [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. 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. A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. Inefficient producers may be may be protected and encouraged, at the expense of more efficient imports. 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.. They produced a model that tried to get rid of the idea that all products are produced under identical technical conditions. 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. 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. However, evidence shows that even when industries are disaggregated to extremely fine levels IIT still occurs, so this argument can be ignored. Before UK joined the EU lamb was imported into the country from New Zealand at a suitable price. For example, with increased sales, Denmark can specialise further in butter production, and produce on large scale, bringing prices down even further (perhaps nearer to the New Zealand level). Prices may fall even further, relative to those of non-member countries, and the process of trade creation continues. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. Intra-industry trade means trade within the same industry, e.g., steel-for-steel. Explanation of Intra-Industry Trade by Economic Theory. Intra-industry trade among the … Similarity is identified here by the goods or services being classified in the same “sector”. -Intra-industry trade is trade within the same industry and follows the North-North trade pattern.-Inter-industry trade is trade from different industries and follows the North-South trade pattern.-The United States can benefit from both of these types of trade through comparative advantages and economies of scale.What is free trade? 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. Dispatches are goods in free circulation within the EU which leave the statistical territory of a given Member State to enter another Member State” (Eurostat, 2011, online). 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. The exact definitions of arrivals and dispatches are given in the following way: “Arrivals are goods in free circulation within the EU which enter the statistical territory of a given Member State. Intra-industry trade for developing countries. [1] However, this is far from the case. With this in mind, it is imperative that the project does not detract energy and resources from initiatives that are having more immediate impacts on intra-African trade and economic growth. A good example of trade diversion in case of UK would be the import of lamb into the UK. 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. AfCFTA will boost intra-African trade by immediately removing all tariffs on 90 percent of goods. The most comprehensive and widely accepted explanation, at least within economic theory, is that of Paul Krugman's New Trade Theory. Although their wording is very similar the terms ‘inter-industry’ and intra-industry’ trade have a very different meanings. Also, the paper has established that one of the main reasons for EU enlargement was to promote intra-industry trade between member-countries. 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. increase in intra-industry trade - the intra-industry share of manufacturing trade has increased significantly since the late 1980s, although it varies by country, from around 30% for Iceland to 90% for Belgium. 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. In intra-industry trade, the level of worker productivity is not determined by climate or geography. In intra-industry trade, the level of worker productivity is not determined by climate or geography. Instead, they help to broaden the concept. Inter- and Intra-Industry Trade within the European Union However, this explanation has also been dismissed. for exports to the EU. The Heckscher-Ohlin-Ricardo model explained that countries of identical factor endowments would still trade due to differences in technology, as this would encourage specialisation and therefore trade, in exactly the same matter that was set out in the Ricardian model. As the scale of output declines, average costs of production increase. Let’s suppose Toyota, a Japanese car company mainly produces family cars, and German car manufacturer Audi concentrates on producing sport cars. For example, if Denmark and the UK form a customs union, tariffs on Danish butter must now be reduced, and once they are completely removed, the free market price of 120p will be highly attractive to UK consumers. In the UK over 80% of manufacturing trade was intra-industry trade in the period 1997-2008.4 3. Within a free trade area many markets and multiple countries are affected by any economic or otherwise changes within that area. The above statement can be explained in a more simple terms. 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. The term is usually applied to international trade, where the same types of goods or services are both imported and exported. It is not even determined by the general level of education or skill. According to Nigel Grimwade, "An explanation cannot be found within the framework of classical or neo-classical trade theory. 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. Difference between Inter-industry and Intra-industry trade. 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. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. In a situation where countries form FTA’s such as EU, trade will be vague and the pattern of trade will change. 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). This paper develops a dynamic industry model with heterogeneous firms to analyze the intra‐industry effects of international trade. Differences between inter-industry and intra-industry trade. 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. Instead, the level of worker productiv… This page was last edited on 7 December 2020, at 23:08. One of the advantages of intra-industry trade is the division of labor which leads to _____. Another potential explanation is provided by Flavey & Kierzkowski (1987). Some writers have still made attempts to explain the intra-industry trade based on factor endowments by establishing link between the product specifications and the different combinations of the basic factors like labour and capital. The production now takes place at S, which is the point of tangency of higher isoquant X 1 of cloth, lower isoquant Y 1 of steel and the factor price line P 1 P 1.. K-L Ratio in cloth at S = Slope of line AS = Tan α 1­. (I 994), to identify vertical and horizontal intra-industry trade in the United Kingdom, Germany was leading in terms of the trade surplus for goods for the year of 2009,  at EUR 134 780 million. If the opening (or expansion) of trade is mostly intra-industry, then the impact on the domestic distribution of factor income is relatively minor. Intra-industry trade is difficult to measure statistically because regarding products or industries as "the same" is partly a matter of definition and classification. Intra-industry trade theory explains the reasons why countries often export the same goods they import, and to explain how they benefit from this type of trade. However, for the same period some EU members have experienced trade deficit as well. Secondly, intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages. 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. 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. We observe that poor countries, even if similar in terms of income, trade much less with each other compared with rich countries Countries where overall labour and capital productivity is low have lower wages and produce less differentiated goods and services Specifically, it is a benefit a particular country obtains as a result of number of countries trading freely among themselves, and creating barriers to non-members. 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. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. In this paper we deploy and develop a methodology which builds upon the work of Abd-el-Rahman (i 99 I) and Greenaway et al. 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. Instead, they help to broaden the concept. due to the difficulties of disentangling vertical and horizontal intra-industry trade in the data. provided access to cheaper imports for consumers and households who now benefit from lower prices and increased choice. The trade within EU from dispatches was calculated to be EUR 2 194 341 million in 2009 (Eurostat, 2011). 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). 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. Inter-industry trade is a trade of products that belong to different industries. 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