International trade is traditionally thought
to consist of each country exporting the goods
most suited to its factor endowment, technology, and climate while importing the goods
least suited for its national characteristics. Such
trade is called inter-industry trade because
countries export and import the products of different industries. But the top exports and
imports of most industrial countries are actually
similar items, such as passenger cars, electrical
generators, or valves and transistors. Indeed,
passenger cars are the number one export and
import of Great Britain, Germany, and France.
In the real world, international trade is largely
trade within broad industrial classifications.
Intra-industry trade occurs when a country
exports and imports goods in the same industry.
Intra-industry trade has been a hot topic among
trade economists for several decades, but it
has received scant attention among economists
in general.
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This article gives an overview of
intra-industry trade for the generalist. In the
debate over NAFTA, for example, commentators
focused much attention on America’s interindustry trade with Mexico but none on the far
more important intra-industry trade.
This article begins with a brief summary of
Ricardian and factor endowment approaches to
trade theory to highlight the contribution of intraindustry trade theory. Next, the article discusses
the foundations of intra-industry trade theory
and the significance of intra-industry trade for
an economy. Finally, the U.S.– Mexico trade relationship is addressed as a pertinent example.
STANDARD TRADE THEORY
To understand why trade economists have
turned their attention to intra-industry trade, it is
necessary to understand the implications of
inter-industry trade. Standard trade theory involves trade in homogeneous products; hence,
with perfect competition there is only interindustry trade. David Ricardo (1817) introduced
standard trade theory when he formulated what
we now call the theory of comparative advantage. Ricardo highlighted the key ingredient of
the theory: goods are more mobile across international boundaries than are resources (land,
labor, and capital). This assumption still characterizes the theory of intra-industry trade. The
theory of comparative advantage deals with all
those causes of international trade that are
generated by the differences among countries.
Ricardo’s contribution was not simply that he
noted countries are different but that he shoshowed
how those differences resulted in all countries
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