Case Study: Intra-Industry International Trade

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[. . .] The Australian data includes one data set that consists of manufacturing commodity (SITC subgroups 5-8) and a second data set -- categorically is referred to as broad manufacturing -- combines commodity (SITC subgroups 5-8) and processed food (SITC subgroups 0-1) (Sharma, 2002). A 7-percent increase in broad manufacturing was seen from the 20-percent level achieved in 1979/1980 to 38% in 1992/1993 (Sharma, 2002). The primary driver of this increase is believed to be due to robust growth in intra-industry trade in commodity manufacturing that reached 29% in 1992/1993 from the 15-percent level of 1979/1980 (Sharma, 2002). The processed food sub-sectors that showed the most dramatic rise in Australia during the same time period were cereals, confectioneries, meat products, and tobacco products (Sharma, 2002).

As stated earlier in this paper, Brander and Krugman (1983) demonstrated that product differentiation generates intra-industry trade between countries, given between-consumer preference diversity and between-country demand similarity (Sharma, 2002). Product differentiation can be a form of horizontal differentiation, with different attributes -- a form of vertical differentiation -- which considers qualities -- and a form of technological breakthrough, which results in an improved product range (Sharma, 2002).

The research findings of Sharma (2002) support the hypothesis that economies of scale and product differentiation contribute to intra-industry trade, but that trade protection tends to contribute to diminished levels of trade (Sharma, 2002). Australia and New Zealand exhibit close economic links and have a "long history of close economic integration, which has been further strengthened in recent years" (Sharma, 2002). Regardless, New Zealand's small share of Australia's overall trade appears not to significantly impact intra-industry trade in Australian manufacturing (Sharma, 2002).

Conclusion

According to the comparative advantage theory of trade, countries will focus on trade characterized by transactions that are complimentary with regard to access to raw materials and competitive advantage. Put simply, countries will tend not to trade the same products. There is no real advantage to be had by such transactions and -- as the gravity theory of trade illustrates -- when distances are great in the supply-demand exchange -- the cost of transport can create disadvantage. When entire industry expands production in a particular geographic area, the average, long-run cost will be lower for each company in the industry in that region (Pugel, 2012). The difference between constant returns to scale and economy of scale is important: constant returns to scale indicate that increases in output and total cost will also increase proportionately, but average cost -- as a result of this ratio -- will be constant (Pugel, 2012). With economy of scale, however, the average cost can decrease as the quantity of output and the total cost increase (Pugel, 2012).

Ordinarily, economists consider the degree of product differentiation and economies of scale to be related to the level of intra-industry trade (Sharma, 2002). As Sharma (2002) and others have shown in their research that the coefficient of economies of scale is significant and does have an expected positive sign. However, the premise of this paper is that companies engaging in oligopolistic interactions bring about "trade in the absence of any of the usual motivations for trade: neither cost differences nor economies of scale are necessary" ((Brander and Krugman, 1983).

References

Anderson, J.E. (2011). The gravity model. Annual Review of Economics, 3. Boston College.

Arribas, I., Perez, F., and Tortosa-Ausina, E. (2009). Measuring globalization of international trade: Theory and evidence. World Development, 37(1), 127-145. doi: 10.1016/j.worlddev.2008.03.009

Baier, S.I., and Bergstrand, J.H., (2009). Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation. Journal of International Economics. Retrieved http://linkinghub.elsevier.com/retrieve/pii/S0022199608001062

Berstrand, J.H. (1985). The gravity equation in international trade: Some micro-economics foundations and empirical evidence. Review of Economics and Statistics, 67(3), 474-481. Doi: 10.2307.1925976

Brander, J.A. And Krugman, P. (1983, November). A "reciprocal dumping" model of international trade. Journal of International Economics, 15 (3/4), 313-321.

Retrieved http://www.nber.org/papers/w1194

Hatab, A.R.A., Shoumann, N.A. And Xuexi, H. (2012). Exploring Egypt-China bilateral trade: dynamics and prospects. Journal of Economic Studies, 39 (3), 314-326

Harrigan, J. (1994). Scale economies and the volume of trade. The Review of Economics and Statistics, 76(2), 321-321. Retrieved from http://search.proquest.com/docview/194679960?accountid=32521

Helpman, E. (1981). International trade in the presence of product differentiation, economies of scale and monopolistic competition: A chamberlin-heckscher-ohlin approach. Journal of International Economics, 11(3), 305-305. Retrieved from http://search.proquest.com/docview/225176765?accountid=32521

Lee, W. (1986). Global economies of scale. Industrial Management, 10(9), 28-30. Retrieved from http://search.proquest.com/docview/217781084?accountid=32521

Milner, H.V. And Yoffie, D.B. (1989, March). Between free trade and protectionism: Strategic trade policy and a theory of corporate trade demands. International organization, 43(2), 239=272. doi.org/10.1017/S0020818300032902… [END OF PREVIEW]

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