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

From: Gerald_A_Levy@MSN.COM
Date: Thu Feb 24 2005 - 09:55:48 EST

> [...] 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."


Trade policy should be considered as well.  Patterns of trade have been
altered, at least since the early 1980's, by requirements imposed by many
nation states related to the 'content' of commodities sold in their nations.
I.e. many nations have simply informed transnational corporations that if
they want to _sell_ goods in their nations then they have to _produce_ a
certain amount of goods (measured as a % or a $ value) in their nations.
This was one of   the stimuli for the creation of Free Trade Zones (FTZs).
If a market or potential market is large enough (as in the case with China)
then this can exert a lot of leverage on TNCs.  This is a dynamic that
mainstream industrial location theory does not explain well.

In some cases, labor relations are a factor in this process as well. I.e. if
TNCs are able to produce the same parts in various countries, then they
are less vulnerable to a work stoppage at a location in any one nation.
This was part of the stimulus for the creration of the 'world car' in the
late 1970's.

Yet, I think that product differentiation is probably the single largest
factor accounting for this intra-industry trade -- especially where
goods consumed by working-class consumers are concerned.  In
the example referred  to in your message of Steinlager exported to
Australia and Fosters simultaneously imported to NZ, an explanation
can certainly be found in the strategy of product differentiation which
seeks to create brand-specific demands.  The assumptions of both
Ricardian and H-O-S trade theory do not fit in well with the reality
of oligopolistic markets.

In solidarity, Jerry

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