Intra Industry

Research Methods

Intra-Industry Trade

Intra-Industry TradeIntra-Industry Trade

Research Methods


Definition

• Trade in which a country exports and imports in the same industry, in contrast to inter-industry trade.

• Example: Korea exports and imports cars.

Research Methods


International trade between The Philippines (RP) and Japan; 1998*

SITC Exports

from RP

Imports

into RP

GL index

8 Miscellaneous manufactured articles 383,167 576,412 0.80

81 Prefabricated buildings 4,147 2,186 0.69

82 Furniture and parts thereof 42,332 6,155 0.25

83 Travel goods, handbags and similar containers 4,804 67 0.03

84 Articles of apparel and clothing accessories 115,627 3,255 0.05

85 Footwear 13,283 920 0.13

87 Prof. scientific & controlling instruments 24,091 175,018 0.24

88 Photographic apparatus 72,174 123,333 0.74

89 Miscellaneous manufactured articles 106,709 265,477 0.57

Measuring intra-industry trade

• Use the Grubel-Lloyd (GL) index to measure intra-industry trade ii

iii MX

MXGL

1

Research Methods


GL index (or IIT index)

X M X M X M

IIT=1 IIT=0 IIT=0.33

Research Methods


n

iijij

n

iijijijij

j

MX

MXMXGL

1

1

)(

)(

GL index (or IIT index)

ijij

ijij

ij MX

MXGL

1

The intra-industry trade index of home country with a country j for an industry i is:

The intra-industry trade index of home country with a country j is:

n

i ijij

ijij

ij MX

MXw

1

1

where

n

iijij

ijijij

MX

MXw

1

)(

Research Methods


IIT index (or GL index)of selected countries

1988-91 1992-95 96-2000

High and increasing IITCzech Republic n.a 66.3 77.4

Slovak Republic n.a 69.8 76

Mexico 62.5 74.4 73.4

Hungary 54.9 64.3 72.1

Germany 67.1 72 72

United States 63.5 65.3 68.5

Poland 56.4 61.7 62.6

Portugal 52.4 56.3 61.3

High and stable IITFrance 75.9 77.6 77.5

Canada 73.5 74.7 76.2

Austria 71.8 74.3 74.2

UK 70.1 73.1 73.7

Switzerland 69.8 71.8 72

Belgium-Luxembourg 77.6 77.7 71.4

Spain 68.2 72.1 71.2

Netherlands 69.2 70 68.9

Sweden 64.2 64.6 66.6

Denmark 61.6 63.4 64.8

Italy 61.6 64 64.7

Ireland 58.6 57.2 54.6

Finland 53.8 53.2 53.9

Low and increasing IITKorea 41.4 50.6 57.5

Japan 37.6 40.8 47.6

Low and stable IITNew Zealand 37.2 38.4 40.6

Turkey 36.7 36.2 40

Norway 40 37.5 37.1

Greece 42.8 39.5 36.9

Australia 28.6 29.8 29.8

Iceland 19 19.1 20.1

Research Methods


Measuring intra-industry trade

• Increasing importance of intra-industry trade

Intra-industry trade (2-digits)

0

1

1961 1966 1971 1976 1981 1986 1991 1996

Japan

USA

Germany

Research Methods


Explaining intra-industry trade

• Supply side: economies of scale• Demand side: love for variety

Research Methods


Explaining intra-industry trade

Belgium 5 million laborers10,000 varieties

produced, 10,000consumed

Netherlands 7 million laborers14,000 varieties


Belgium 5 million laborers10,000 varieties


Netherlands 7 million laborers14,000 varieties


a. Autarky

b. International trade10,000 varieties;

7/12 th of production

14,000 varieties;5/12 th of production

Research Methods


An Alternative interpretation: intermediate goods

Variety 1A

Variety NA

Variety 2B

Variety 1B

Variety 2A

Variety NB

Consumer country A Consumer country B

.

.

....

Exports from B to A

Exports from A to B

Research Methods


Intermediate 1A

Intermediate NA

Intermediate 2B

Intermediate 1B

Intermediate 2A

Intermediate NB

Producers country A Producers country B

.

.

....

Exports from B to A

Exports from A to B

Consumers country A Consumers country B

An Alternative interpretation: intermediate goods

Internationalization of production

Research Methods


Japan’s CaseJapan’s Case

Research Methods


U.S.-Japan trade

• Japan and U.S. are important trading partners

• U.S. is Japan’s largest trade partner• Japan is the third or fourth largest U.S.

trading partner• Japan has been running trade surplus• U.S. has been running trade deficit

Research Methods


U.S. and Japan are important trading partners

Research Methods


Japan’s trade surplus and U.S. trade deficit

Research Methods


Pattern of inter-industry trade

• Comparative advantage determines the pattern of inter-industry trade

• Japanese pattern of inter-industry trade reflects the comparative advantage very well

• Japan’s exports skewed toward industries such as machinery and transportation machinery

• The imports skewed toward food, raw materials, and fuels

Research Methods


Pattern of inter-industry trade: Japan and U.S.

Research Methods


Intra-industry trade

• Inter-industry trade is not the whole story of today’s international trade

• Country often exports and imports in the same industry

• Variety of preferences within a country (or preference for variety as the country) induces intra-industry trade

Research Methods


Intra-industry trade index1990 1997

Japan 0.26 0.36

United States 0.55 0.62

Germany 0.56 0.50

United Kingdom

0.59 0.59

South Korea 0.28 0.43Source: C. Fred Bergsten, Takatoshi Ito, and Marcus Noland (2001). No More Bashing. Institute of International Economics, Table 4.2.

Research Methods


Japan’s low intra-industry trade

• GL is very low for Japan. Why?• Several possibilities1. Japan is closed for foreign goods2. Japan’s preferences are different (less

variety?)3. Transportation costs make intra-industry

trade more costly (but Japan’s m is lower than that for South Korea)

4. Poor natural resources in Japan make Japan depend more on inter-industry trades (how about Korea?)

Research Methods


Horizontal IIT vs. Vertical IIT

Horizontal IIT vs. Vertical IIT

Research Methods


HIIT vs. VIIT

• HIIT: intra-industry trade in horizontally differentiated products (products differentiated by attributes)

• VIIT: intra-industry trade in vertically differentiated products (products differentiated by quality)

Research Methods


HIIT vs. VIIT

aUV

UVa

imi

exi 11

imi

exi

UV

UVa 1a

UV

UVim

i

exi 1 or

HIIT

VIIT

Research Methods


Korea’s CaseKorea’s Case

Source: 오근엽 , 주혜영 (2000) “ 한국의 수평적ㆍ수직적 산업내무역과 국가특성 : OECD 국가와의 무역을 중심으로” , 국제통상연구 제 5 권 제 1 호

Research Methods


Korea’s IIT index대상국 1994 1997

US 26.55 44.16

Japan 26.25 33.00

UK 16.19 25.17

France 14.52 21.11

Italy 10.30 18.11

Germany 10.07 16.49

Belgium-L 8.15 14.76

Denmark 7.88 14.59

Finland 7.84 13.70

Swiss 7.61 12.73

Canada 7.61 10.19

Netherlands

7.40 9.63

대상국 1994 1997

Sweden 6.39 6.24

Spain 6.14 6.02

Australia 5.62 5.67

Austria 5.28 5.18

Norway 4.74 4.70

Ireland 4.32 3.57

N. Zealand 2.04 2.73

Mexico 1.94 2.64

Portugal 1.49 2.33

Iceland 0.69 0.43

Greece 0.41 0

SITC 5 digit

Research Methods


Korea’s HIIT & VIIT indexTotal

IITVIIT HIIT

a=15% a=25% a=15% a=25%

share in total

share in IIT

share in total

share in IIT

share in total

share in IIT

share in total

share in IIT

US 26.5 24.5 92.7 23.3 87.8 1.9 7.5 3.2 12.1

Japan 26.2 23.7 90.6 22.3 85.0 2.4 9.3 3.9 14.9

UK 16.1 15.1 93.5 14.5 89.6 1.0 6.4 1.6 10.3

France 14.5 13.5 93.4 13.0 89.8 0.9 6.5 1.4 10.1

Research Methods


Determinants of IIT

• Difference of capital intensity– Proxy: difference in GDP

per capita

• Size of the economy of both countries

• Difference of the size of the economy

• distance

2

jk

jk

kj PCIPCI

PCIPCIDPCI

2jk

kj

GDPGDPSGDP

2

jk

jk

kj GDPGDP

GDPGDPDGDP

Research Methods


Empirical resultsIIT VIIT

(a=25%)HIIT

(a=25%)

Constant -2.6022 (-6.44)

-2.9074(-7.19)

-3.9673(-12.29)

DPCI 0.0064 (0.22)

+ 0.0578(0.21)

- 0.2904(1.12)

SGDP 0.0030(4.27)

+ 0.0002(3.13)

+ 0.0006(9.35)

DGDP 0.4298(2.59)

+ 0.5841(3.42)

- -0.5980(-3.52)

DIST -0.0118(-0.50)

- -0.0041(-0.06)

- -0.0576(-3.32)

R2

N0.917

920.923

920.9892

Research Methods


Export Similarity Index

Research Methods


• ESI measures the competition between the country a and the country b in the country c.

– Xi(ac) is the share of the product i in the exports of the country a to country c.

– Xi(bc) is the share of the product i in the exports of the country b to country c.

Export Similarity Index (ESI)

100)(),(),(

i

ii bcXacXMincabS

Research Methods


Export Similarity Index (ESI)

A B

2 4

3 6

0 0

0 0

0 0

A B

2 0

3 0

0 20

0 10

0 0

ESI = 1 ESI = 0

Prod

1

2

3

4

5

Prod

1

2

3

4

5

Research Methods


The effect of weak yen

Research Methods


The effect of weak yen• A weak Yen can affect the segments of Asia’s exports that comp

ete directly with Japan in third markets. Japanese exporters would benefit from a weak Yen as they would be able to price their products cheaper in US$ terms, and this would reduce the demand for other Asian countries exports.

• However, the impact would not be uniform across the Asian economies. Korea and Taiwan, which have trade structures highly similar to Japan and as such compete more with the latter in the same markets, will suffer more from a weak Yen.

• In 2000, close to two-thirds of all products exported by the NIEs were in the same category as Japan. ASEAN economies such as Indonesia and the Philippines, as well as China, whose exports do not directly compete with Japanese manufacturers, are not expected to suffer much from a weak Yen.

Research Methods


ESI between China and Korea1995 1996 1997 1998 1999

Argentina 25.1 21.2 18.4 20.4 21.3

Brazil 23.6 20.3 20.3 17.6 22.3

Chile 13.5 13.1 13.4 14.5 14.4

Colombia 13.6 8.8 9.1 10.3 12.2

Ecuador 10.2 9.4 10.4 9 4.3

Mexico 23.6 16.2 18.7 24.8 31.7

Panama 9.8 6.2 12.9 11 9.3

Paraguay 16.2 16.9 16.3 13 13.2

Peru 9.2 5.6 8.8 10.5 12.1

Venezuela 10.3 10.7 10.9 11.4 12.5

Latin America 22.1 20.7 21.8 21 23.5

USA 30.3 30.1 30.5 33.5 34.1

Japan 34.1 34.1 33.1 35.2 34.1

France 18.4 23.4 16.5 19.2 17.1

Germany 17.5 21.6 22 26.3 27.1

Indonesia 16 16.9 18.8 15.4 19.7

Malaysia 11.4 13.3 17.3 19.9 17.6

World 36.2 36.1 36.3 35.9 38.4

Research Methods


Export Similarity between intra-regional exports and extra-regional

exports

ESI between intra- & extra-regional exports: Mercosur

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Arg - 38.0 39.5 35.2 34.0 34.5 30.5 33.3 33.0 32.3

Brazil 45.0 40.0 39.0 39.0 40.3 38.6 34.8 35.1 36.1 36.4

Chile 38.3 56.3 52.1 46.3 47.2 52.6 49.8 49.6 51.2 -

Par 39.4 49.1 37.4 21.1 32.7 56.8 50.2 49.6 40.1 53.5

Source: estimated from UN COMTRADE dataset

Research Methods


Structural Change Index

Research Methods


• SCI measures the extent to which industries are growing at different rates, which results in compositional shifts – that is, structural change.

– Si,t is the share of output (or employment) of the industry i at period t.

Structural Change Index (SCI)

1002

11,,

i

titi SSS

Research Methods



t0 t1

2 4

3 6

0 0

0 0

0 0

t0 t1

2 0

3 0

0 20

0 10

0 0

SCI = 0 SCI = 1

Prod

1

2

3

4

5

Prod

1

2

3

4

5

Research Methods



• SCIs do not measure changes in the overall level of activity or employment — the index would be zero if all industries were growing (or declining) at the same rate.

• Any changes in the output or employment shares of the different industries used to compile the SCIs reflect the ‘net’ impact of the many influences on the composition of output and employment — some of which pull in different directions.

• For example, increases in demand for some of the products of a particular industry group may be offset by reductions or slower rates of demand growth for other products of the same industry group.

Research Methods


Intra Industry

Business

japan trade japan

intraindustry trade

trade surplus

trade deficit

definition trade

industry i

iit share

largest trade partner