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N° 1997 - 01 |
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| January |
| Intra-Industry Trade : Methodological
Issues Reconsidered |
Lionel Fontagné
Michael Freudenberg |
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In the 1960s, the evidence of intra-industry
trade (IIT) between countries of similar development levels severely limited the
scope of traditional theories of international trade based on the concept of comparative
advantage. Originally, such simultaneous exports and imports within industries
led to a concept "in search of a (new) theory". Today, a synthesis of determinants
of IIT and inter-industry trade is attained. And progress during the last 15 years
has been such that today, it is the theory which is in search of an appropriate
empirical methodology.
The contemporary theoretical synthesis is based on the widespread view that monopolistic competition and (internal) increasing returns lead to IIT between similar countries, whereas the old comparative advantage is still be at work for countries separated by a high economic distance, i.e. a large difference in factor endowments, technology levels etc. These studies consider products to be horizontally differentiated: products are available to consumers in different varieties, and international trade, as it increases the size of the market, simply leads to a greater variety of goods and possibly to the achievement of economies of scale. Here, the economic distance increases inter-industry trade and conversely reduces IIT.
But products are not only (horizontally) differentiated by secondary attributes, but also differ by quality and price: this is a case of vertical product differentiation. Such a distinction modifies the theoretical framework: using the "integrated equilibrium" approach, the economic distance between countries is no longer the basis for specialisation between industries along a comparative advantage scheme only, but also the basis for a specialisation along ranges of quality, within industries.
Combining these two kinds of product differentiation into a single model of imperfect competition -in which consumers choose first among qualities and then among varieties of each quality- yields the following central result: different countries will engage in IIT in vertically differentiated products where is similar ones will engage in IIT of varieties within similar qualities. Here, the economic distance - here the difference among countries in the allocation of specific resources along the quality spectrum - is compatible with IIT in vertically differentiated products.
Contrasting with an increasing complexity of models of trade under imperfect competition, the bulk of empirical work still uses Grubel and Lloyd-type indicators, based on the degree of overlap in trade. General shortcomings of such indicators can easily be corrected, e.g. using a strict bilateral basis at the most detailed level of sectoral breakdown, eventually distinguishing between horizontal and vertical differentiation. However some specific shortcomings of indicators remain due to its very construction.
The proposed methodology breaks down total trade into three trade types: two-way trade in similar products, two-way trade in vertically differentiated products, or one-way trade. Both exports and imports being part of the same type, a single explanation is associated to each flow registered, offering a guaranty of coherence between theoretical insights and empirical measurement. Using a data set embodying data flows of 11 European countries facing 10 partners for around 10 000 products, the methodology emphasises that the recent increase in IIT in Europe is entirely due to a trade in vertically differentiated products.
To better apprehend the countries' specialisation along the quality ranges, it is assumed that differences in prices reflect quality differences. Thus, flows for the same product with a given trade partner can exist in three different price/quality ranges: up-, middle- or down-market, depending on the difference to the European average price. The specialisation of each country is then characterised. Finally trade types and price/quality ranges are two distinct and strictly independent notions, despite their common use of unit values. |
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