Intra Industry

1. Research Methods
Intra-Industry Trade
Intra-Industry Trade

2. 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.

3. 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 383,167576,412 0.80
81Prefabricated buildings 4,147 2,186 0.69
82Furniture and parts thereof 42,332 6,155 0.25
83Travel goods, handbags and similar containers4,804 67 0.03
84Articles of apparel and clothing accessories115,627 3,255 0.05
85Footwear 13,283 920 0.13
87Prof. scientific & controlling instruments 24,091175,018 0.24
88Photographic apparatus 72,174123,333 0.74
89Miscellaneous manufactured articles 106,709265,477 0.57
Measuring intra-industry trade
•Use the Grubel-Lloyd (GL) index
to measure intra-industry trade
ii
ii
i
MX
MX
GL


1

4. Research Methods
Intra-Industry Trade
GL index (or IIT index)
X M X M X M
IIT=1 IIT=0 IIT=0.33

5. Research Methods
Intra-Industry Trade
 
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GL
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GL index (or IIT index)
ijij
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GL
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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:
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where
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6. Research Methods
Intra-Industry Trade
IIT index
(or GL index)
of selected
countries
  1988-91 1992-95 96-2000
High and increasing IIT
Czech 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 IIT
France 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 IIT
Korea 41.4 50.6 57.5
Japan 37.6 40.8 47.6
Low and stable IIT
New 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

7. 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

8. Research Methods
Intra-Industry Trade
Explaining intra-industry trade
•Supply side: economies of scale
•Demand side: love for variety

9. Research Methods
Intra-Industry Trade
Explaining intra-industry trade
Belgium
5 million laborers
10,000 varieties
produced, 10,000
consumed
Netherlands
7 million laborers
14,000 varieties
produced, 14,000
consumed
Belgium
5 million laborers
10,000 varieties
produced, 24,000
consumed
Netherlands
7 million laborers
14,000 varieties
produced, 24,000
consumed
a. Autarky
b. International trade
10,000 varieties;
7/12
th
of production
14,000 varieties;
5/12
th
of production

10. Research Methods
Intra-Industry Trade
An Alternative interpretation:
intermediate goods
Variety 1
A
Variety N
A
Variety 2
B
Variety 1
B
Variety 2
A
Variety N
B
Consumer country A Consumer country B
.
.
.
.
.
.
Exports from B to A
Exports from A to B

11. Research Methods
Intra-Industry Trade
Intermediate 1
A
Intermediate N
A
Intermediate 2
B
Intermediate 1
B
Intermediate 2
A
Intermediate N
B
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

12. Research Methods
Intra-Industry Trade
Japan’s Case

13. 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

14. Research Methods
Intra-Industry Trade
U.S. and Japan are
important trading partners

15. Research Methods
Intra-Industry Trade
Japan’s trade surplus and U.S.
trade deficit

16. 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

17. Research Methods
Intra-Industry Trade
Pattern of inter-industry trade:
Japan and U.S.

18. 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

19. Research Methods
Intra-Industry Trade
Intra-industry trade index
0.430.28South Korea
0.590.59United Kingdom
0.500.56Germany
0.620.55United States
0.360.26Japan
19971990
Source: C. Fred Bergsten, Takatoshi Ito, and Marcus Noland (2001). No
More Bashing. Institute of International Economics, Table 4.2.

20. Research Methods
Intra-Industry Trade
Japan’s
low intra-industry trade
•GL is very low for Japan. Why?
•Several possibilities
3.Japan is closed for foreign goods
4.Japan’s preferences are different (less variety?)
5.Transportation costs make intra-industry trade
more costly (but Japan’s m is lower than that for
South Korea)
6.Poor natural resources in Japan make Japan
depend more on inter-industry trades (how
about Korea?)

21. Research Methods
Intra-Industry Trade
Horizontal IIT vs. Vertical IIT

22. 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)

23. Research Methods
Intra-Industry Trade
HIIT vs. VIIT
a
UV
UV
a
im
i
ex
i
 11
im
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ex
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UV
UV
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or
HIIT
VIIT

24. Research Methods
Intra-Industry Trade
Korea’s Case
Source: 오근엽, 주혜영 (2000) “한국의 수평적ㆍ수직적 산업내무역과 국
가특성: OECD 국가와의 무역을 중심으로”, 국제통상연구 제5권 제1호

25. Research Methods
Intra-Industry Trade
Korea’s IIT index
18.1110.30Italy
21.1114.52France
16.4910.07Germany
25.1716.19UK
33.0026.25Japan
44.1626.55US
14.768.15Belgium-L
14.597.88Denmark
9.637.40Netherlands
10.197.61Canada
12.737.61Swiss
13.707.84Finland
19971994대상국
4.704.74Norway
5.185.28Austria
3.574.32Ireland
5.675.62Australia
6.026.14Spain
6.246.39Sweden
2.732.04N. Zealand
2.641.94Mexico
SITC 5 digit
00.41Greece
0.430.69Iceland
2.331.49Portugal
19971994대상국

26. Research Methods
Intra-Industry Trade
Korea’s HIIT & VIIT index
10.11.46.50.989.813.093.413.514.5France
10.31.66.41.089.614.593.515.116.1UK
14.93.99.32.485.022.390.623.726.2Japan
12.13.27.51.987.823.392.724.526.5US
share
in IIT
share
in
total
share
in IIT
share
in
total
share
in IIT
share
in
total
share
in IIT
share
in
total
a=25%a=15%a=25%a=15%
HIITVIITTotal
IIT

27. 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
PCIPCI
DPCI



2
jk
kj
GDPGDP
SGDP


 
2
jk
jk
kj
GDPGDP
GDPGDP
DGDP




28. Research Methods
Intra-Industry Trade
Empirical results
-
+
+
+
VIIT
(a=25%)
-
-
+
-
HIIT
(a=25%)
-0.0576
(-3.32)
-0.0041
(-0.06)
-0.0118
(-0.50)
DIST
0.98
92
-0.5980
(-3.52)
0.0006
(9.35)
0.2904
(1.12)
-3.9673
(-12.29)
0.923
92
0.917
92
R
2
N
0.5841
(3.42)
0.4298
(2.59)
DGDP
0.0002
(3.13)
0.0030
(4.27)
SGDP
0.0578
(0.21)
0.0064
(0.22)
DPCI
-2.9074
(-7.19)
-2.6022
(-6.44)
Constant
IIT

29. Research Methods
Intra-Industry Trade
Export Similarity Index

30. Research Methods
Intra-Industry Trade
•ESI measures the competition between the
country a and the country b in the country c.
–X
i(ac) is the share of the product i in the exports
of the country a to country c.
–X
i
(bc) is the share of the product i in the exports
of the country b to country c.
Export Similarity Index (ESI)
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31. Research Methods
Intra-Industry Trade
Export Similarity Index (ESI)
00
00
00
63
42
BA
00
100
200
03
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BA
ESI = 1 ESI = 0
5
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Prod
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32. Research Methods
Intra-Industry Trade
The effect of weak yen

33. Research Methods
Intra-Industry Trade
The effect of weak yen
•A weak Yen can affect the segments of Asia’s exports that
compete 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.

34. Research Methods
Intra-Industry Trade
ESI between China and Korea
1995 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

35. Research Methods
Intra-Industry Trade
Export Similarity between intra-regional
exports and extra-regional exports
Source: estimated from UN COMTRADE dataset
53.540.149.650.256.832.721.137.449.139.4Par
-51.249.649.852.647.246.352.156.338.3Chile
36.436.135.134.838.640.339.039.040.045.0Brazil
32.333.033.330.534.534.035.239.538.0-Arg
1999199819971996199519941993199219911990
ESI between intra- & extra-regional exports: Mercosur

36. Research Methods
Intra-Industry Trade
Structural Change Index

37. 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.
–S
i,t is the share of output (or employment) of the
industry i at period t.
Structural Change Index (SCI)
100
2
1
1,,
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SSS

38. Research Methods
Intra-Industry Trade
Structural Change Index (SCI)
00
00
00
63
42
t1t0
00
100
200
03
02
t1t0
SCI = 0 SCI = 1
5
4
3
2
1
Prod
5
4
3
2
1
Prod

39. 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.

40. Research Methods
Intra-Industry Trade