Research Methods
Intra-Industry Trade
Intra-Industry TradeIntra-Industry Trade
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
GL index (or IIT index)
X M X M X M
IIT=1 IIT=0 IIT=0.33
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
Explaining intra-industry trade
• Supply side: economies of scale• Demand side: love for variety
Research Methods
Intra-Industry Trade
Explaining intra-industry trade
Belgium 5 million laborers10,000 varieties
produced, 10,000consumed
Netherlands 7 million laborers14,000 varieties
produced, 14,000consumed
Belgium 5 million laborers10,000 varieties
produced, 24,000consumed
Netherlands 7 million laborers14,000 varieties
produced, 24,000consumed
a. Autarky
b. International trade10,000 varieties;
7/12 th of production
14,000 varieties;5/12 th of production
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
Japan’s CaseJapan’s Case
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
U.S. and Japan are important trading partners
Research Methods
Intra-Industry Trade
Japan’s trade surplus and U.S. trade deficit
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
Pattern of inter-industry trade: Japan and U.S.
Research Methods
Intra-Industry Trade
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
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
Intra-Industry Trade
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
Intra-Industry Trade
Horizontal IIT vs. Vertical IIT
Horizontal IIT vs. Vertical IIT
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
HIIT vs. VIIT
aUV
UVa
imi
exi 11
imi
exi
UV
UVa 1a
UV
UVim
i
exi 1 or
HIIT
VIIT
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
Export Similarity Index
Research Methods
Intra-Industry Trade
• 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
Intra-Industry Trade
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
Intra-Industry Trade
The effect of weak yen
Research Methods
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
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
Intra-Industry Trade
Structural Change Index
Research Methods
Intra-Industry Trade
• 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
Intra-Industry Trade
Structural Change Index (SCI)
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
Intra-Industry Trade
Structural Change Index (SCI)
• 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 Trade