Catalog

Intra-industry trade in manufactures

Intra-industry trade-trade in which a country simultaneously imports and exports similar products (defined as belonging to the same Standard International Trade Classification (SITC) 3-digit product group) is an indicator of the sophistication of consumer markets and industrial development (OECD 2002). As barriers to trade and investment are reduced, multinational enterprises increasingly engage in production activities across a range of locations seeking to apply their firm's assets with location-specific advantages, including abundance of particular types of resources or a favorable geographic position.

More open economies are likely to have a high ratio of intra-industry trade in manufactures, particularly in sophisticated and technology-intensive products like chemicals, office machinery, transport equipment, and electronics. Increased variety and choice in production and consumption is associated with intra-industry trade. In theory intra-industry trade in similar but differentiated products takes place in markets characterized by monopolistic competition (many producers and consumers, consumer tastes favor variety, and firms have some market power) as opposed to perfect competition where firms produce homogeneous products and are price-takers and consumers are indifferent between firms supplying the homogeneous product. Intra-industry trade may also arise where fragmentation of the production process in order to minimize costs across locations is taking place. Intra-industry trade (IIT) is measured by an index designed by Grubel and Lloyd (1975) varying in value between zero and one:

If the country only imports or exports products in sector i, the second term on the right side of the equation is equal to one and the whole expression collapses to zero signifying pure inter-industry trade. Similarly, if the country simultaneously imports and exports the same amounts of products in sector i, the second term is zero and the whole expression is equal to one, signifying pure intra-industry trade.

Intra-industry trade in East and Southeast Asian manufacturing is evaluated by factor intensity between 1995 and 2004 (Table 1.6.7) using SITC 3-digit product categories. There are four types of manufacturing industries: unskilled labor-intensive; natural resource-intensive; human capital-intensive; and technology-intensive.

Trade-weighted values of the IIT index have been calculated for each group of manufactured products for Japan, PRC, NIEs, ASEAN-5, East and Southeast Asia, and East and Southeast Asia excluding Japan. These are weighted by the amount of trade in each of the 3-digit product groups compared with the sum of trade in the product group as a whole. The summary IIT indexes for natural resource-intensive, technology-intensive, and human capital-intensive manufactures are quite large and rising over the period 1995-2004. The exception is unskilled labor-intensive manufactures, where the IIT indexes generally fell. This reflects predominantly a decline in intra-industry trade in textiles. The reasons for this decline are beyond the immediate scope of this report but may reflect declines in PRC imports of intermediate textiles associated with the rapidly increasing capacity in textile production that has occurred since it joined WTO (Anson and Brocklehurst 2006). One may distinguish between horizontal IIT in which countries import and export products at a similar level of processing with vertical IIT where countries import and export goods at differing levels of processing. The latter is thought to take place where production is fragmented so that each manufacturing operation in the value chain takes place in the lowest cost or most advantageous location. The IIT in technology-intensive and human capital-intensive products in East and Southeast Asia most likely is of the vertical type associated with the rise in trade in machinery parts and components.