[OPE-L] Fwd: A new anomaly for the Ricardian theory of international trade

From: glevy@PRATT.EDU
Date: Thu Feb 24 2005 - 07:46:43 EST

---------------------------- Original Message ------------------------
Subject: A new anomaly for the Ricardian theory of international trade
From:    "Jurriaan Bendien" <andromeda246@hetnet.nl>
Date:    Thu, February 24, 2005 5:15 am

After looking at the international trade in cars a while ago, I was
motivated to inquire further into the phenomenon of goods of the same type
 being both imported and exported (I am not talking about re-export here).
We  are used to thinking of different countries exchanging different kinds
of  products in international trade, which provides a rationale for the
theory  of comparative advantage. But what if trade between different
countries  involves products which are basically identical in type, apart
from their  brands? In reality, it is a growing trend, not just in Europe
or between the  USA and Mexico, but also in Australasia. New Zealand's
foreign trade  ministry for example comments:

"The world's trade patterns have changed very markedly in the past few
decades. International trade is no longer dominated by the simple
nineteenth  century Ricardian model of exchange of British cloth for
Portuguese wine or  the Heckscher Ohlin explanation of inter-industry
trade patterns. One of the  most important trends has been the emergence
and growth of intra-industry  trade, particularly between developed
countries.  Intra-industry trade (IIT)  is defined as the simultaneous
import and export of goods within the same  industry.  For example, New
Zealand and Australia simultaneously export and  import Steinlager and
Fosters beer between each other, while Japan and the  United States both
export and import automobiles.  This is very different  from
inter-industry trade, which involves countries exchanging the products
for different industries. (...)  Grubel and Lloyd (1975) were the first
economists to seek to measure the significance of intra-industry trade.
They measured IIT as the proportion (percent) of a country's total trade
(exports plus imports) in the products of a given industry which was
matched  or balanced (exports roughly equaled imports) at one end of the
scale and  large imbalances at the other end."  [see  Grubel, H. G. and
Lloyd, P.J.  (1975), Intra-Industry Trade: The Theory and Measurement of
International  Trade in Differentiated Products, London and New York: John
Wiley & Sons.]

As regards the literature:

"Verdoon (1960) was the first to report on observations of intra-industry
transactions between European countries in a study of the changes in
intrablock trade of the Benelux region. Balassa (1966) defined
intra-industry trade as the inter-country exchange of commodities
belonging  to the same industry. They observed that adjustment to
intra-industry trade  has a lesser cost than adjustment to inter-industry
trade due to the less  disruptive effects of minimal changes in factor
income distribution. After  many years of obscurity, Grubel and Lloyd
(1975) re-ignited interest in the  concept of intra-industry trade and
brought it to the attention of trade  theorists by posing questions which
the current trade theory could not  answer. They identified economies of
scale, location theory, and
monopolistic competition as the most important concepts in developing a
model of intra-industry trade, while pinpointing product differentiation
as  the underlying factor resulting in intra-industry trade. Krugman
(1979)  developed a model which suggested that increasing returns to scale
lead to  intra-industry trade of differentiated products between countries
with  identical characteristics in a Chamberlinian monopolistic
competition market  structure. Hamilton and Kniest (1991) expanded upon
the work of Caves (1981)  showing the importance of increases in the share
of 'new' intra-industry  trade over increases in just the share of
intra-industry trade."

In "Trade overlap and intra-industry trade" (Economic Inquiry 13, 1975,
pp.  581-589), J. Michael Finger described IIT as a statistical artifact
created  by the vagaries of statistical classifications: products
categorised as  being the same type were really different. But David
Greenaway and Chris  Milner 1983 show in "On the Measurement of
Intra-Industry Trade (Economic  Journal 93, 1983, pp. 900-908) that
although the share in IIT may reduce at  a disaggregated level, it does
not disappear.

Evidently in the era of "globalisation" it is profitable for private
enterprises in a country both to import and export the same type goods of
the same type! One wonders about the economic and ecological rationality
of  that.


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