Intra Industry Trade and International Production and Distribution Networks
Inter Industry Trade is known as One way Trade.
Intra Industry Trade is known as Two way Trade.
Intra Industry Trade (IIT)
- Can be Intra Firm or Inter Firm (Arms’ Length)
- Can be Vertical or Horizontal (VIIT and HIIT)
Intra Industry Trade is measured using G-L Index among other indices.
Import and Export of Parts and Components (Intermediate Goods) causes measurement issues of IIT.
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
Intra-industry trade is defined as the simultaneous export and import of products, which belong to the same statistical product category. According to Kol and Rayment (1989), three types of bilateral trade flows may occur between countries: inter-industry trade, horizontal IIT and vertical IIT. Historically, the international trade between countries has been inter-industry form, which is described as the exchange of products belonging to different industries. Traditional trade models, such as Heckscher-Ohlin model or Ricardian model, have tried to explain this type of trade based on comparative advantage in relative technology and factor endowments. However, a significant portion of the world trade over the last three decades took the form of the intra-industry trade rather than inter-industry trade. As a result, the traditional trade models has been considered to be inadequate in explaining this new trade pattern because in these models there is no reason for developed countries to trade in similar but slightly differentiated goods.
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
Horizontal IIT has been defined as the exchange of similar goods that are similar in terms of quality but have different characteristics or attributes. The models developed by Dixit and Stiglitz (1977), Lancaster (1980), Krugman (1980, 1981), Helpman (1981), and Helpman and Krugman (1985) explain horizontal IIT by emphasizing the importance of economies of scale, product differentiation, and demand for variety within the setting of monopolistic competition type markets. In these models, IIT in horizontally differentiated goods should be greater, the greater the difference in income differences and relative factor endowments between the trading partners.
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
In contrast, vertical IIT represents trade in similar products of different qualities but they are no longer the same in terms unit production costs and factor intensities.5 Falvey (1981) and Falvey and Kierzkowski (1987) have shown that the IIT in vertically differentiated goods occurs because of factor endowment differences across countries. In particular, Falvey and Kierzkowski (1987) suggest that the amount of capital relative to labor used in the production of vertically differentiated good indicates the quality of good. As a consequence, in an open economy, higher- quality products are produced in capital abundant countries whereas lower-quality products are produced in labor abundant countries. This will give rise to intra-industry trade in vertically differentiated goods: the capital abundant country exports higher-quality varieties and labor abundant country exports lower-quality products. The models of vertical IIT predict that the share of vertical IIT will increase as countries’ income and factor endowments diverge.
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
Various ways of calculating intra-industry trade have been proposed in the empirical literature, including the Balassa Index, the Grubel-Lloyd (G-L) index, the Aquino index. The most widely used method for computing the IIT is developed by Grubel and Lloyd (1971). However, beside aggregation bias, the traditional G-L index has one major problem often cited in the empirical literature. The unadjusted G-L index is negatively correlated with a large overall trade imbalance. With national trade balances, the level of IIT in a country will be clearly underestimated. To avoid this problem, Grubel and Lloyd (1975) proposed another method to adjust the index by using the relative size of exports and imports of a particular good within an industry as weights.
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
From Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
From: World Trade Flows Characterization: Unit Values, Trade Types and Price Ranges
Key Terms:
- Intra Industry Trade
- Inter Industry Trade
- Horizontal IIT
- Vertical IIT
- Ricardo’s Theory of Comparative Advantage
- Factor Inputs
- Factor Endowments
- Factor Prices
- Heckscher-Ohlin Model of Trade
- Stolper-Samuelson Theorem
- Grubel – Lloyd Index
- Fontagné and Freudenberg index (FF)
- New Economic Geography (NEG)
- Spatial Economy
- UN COMTRADE
- SITC Codes
- Balassa Index
- Acquino Index
- Bilateral Trade Flows
Please see my related posts:
Understanding Trade in Intermediate Goods
Trends in Intra Firm Trade of USA
FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms
Relational Turn in Economic Geography
Understanding Global Value Chains – G20/OECD/WB Initiative
Key Sources of Research:
International Production and Distribution Networks in East Asia: Eighteen Facts, Mechanics, and Policy Implications
Fukunari Kimura
2006
The Formation of International Production and Distribution Networks in East Asia
Mitsuyo Ando and Fukunari Kimura
“The mechanics of production networks in Southeast Asia: the fragmentation theory approach”
Fukunari Kimura
July 2007
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.600.7481&rep=rep1&type=pdf
“Fragmentation in East Asia: Further Evidence”
May 2006
Mitsuyo Ando
Fukunari Kimura
Click to access Articolo%204.pdf
Modern International Production and Distribution Networks: the Role of Global Value Chains
Fukunari Kimura
2016
Click to access presentation_fukunari_kimura.pdf
Two-dimensional Fragmentation in East Asia: Conceptual Framework and Empirics
Fukunari Kimura and Mitsuyo Ando
Deepening and Widening of Production Networks in ASEAN
Ayako Obashi
Fukunari Kimura
2016
Click to access ERIA-DP-2016-09.pdf
Global production sharing and trade patterns in East Asia
Prema-chandra Athukorala
June 2013
PRODUCTION SHARING IN EAST ASIA: CHINA’S POSITION, TRADE PATTERN AND TECHNOLOGY UPGRADING
Laike Yang
Click to access gdsmdp20152yang_en.pdf
International Production Networks: Contributions of Economics to Policy Making
Fukunari Kimura
2016
https://www.jstage.jst.go.jp/article/internationaleconomy/19/0/19_ie2016.03.fk/_pdf
Production networks in East Asia: What we know so far
Fukunari Kimura and Ayako Obashi
No. 320
November 2011
Structure and Determinants of Intra-Industry Trade in the U.S. Auto-Industry
Kemal Turkcan and Aysegul Ates
2010
Click to access JIGES%20DECEMBER%202009%20TURKCAN%203-10-2010%20Turkcan_Ates_JIGES.pdf
Vertical Intra-Industry Trade: An Empirical Examination of the U.S. Auto-Parts Industry
Kemal TÜRKCAN and Ayşegül ATEŞ
(This version October 2008)
Intra-industry trade, fragmentation and export margins: An empirical examination of sub-regional international trade
Yushi Yoshida
https://www.iseg.ulisboa.pt/aquila/getFile.do?method=getFile&fileId=501284
A Practical Guide to Trade Policy Analysis
WTO
Click to access wto_unctad12_e.pdf
Intra-Industry Trade between Japan and European Countries: a Closer Look at the Quality Gap in VIIT
Yushi Yoshida, Nuno Carlos Leitão and Horácio Faustino
Evolving pattern of intra-industry trade specialization of the new Member States (NMS) of the EU: the case of automotive industry
Elżbieta Kawecka-Wyrzykowska
2008
Click to access publication14289_en.pdf
VERTICAL AND HORIZONTAL INTRA-INDUSTRY TRADE BETWEEN THE U.S. AND NAFTA PARTNERS
2009
Globalizing Production Structure and Intra-Industry Trade: The Case of Turkey
Emine Kılavuz
Hatice Erkekoğlu
Betül Altay Topcu
2013
https://www.econjournals.com/index.php/ijefi/article/viewFile/563/pdf
On the Measurement of Vertical and Horizontal Intra-Industry Trade: A Geometric Exposition
A.K.M. Azhar Robert J.R. Elliott
Determinants of United States’ Vertical and Horizontal Intra-Industry Trade
2013
World Trade Flows Characterization: Unit Values, Trade Types and Price Ranges
Charlotte Emlinger & Sophie Piton
2014
Viewpoints which Matter 
6 thoughts on “Intra Industry Trade and International Production and Distribution Networks”