Intra-Trade Industry as a Component of World Trade - Research Paper Example

INTRA-TRADE INDUSTRY AS A COMPONENT OF WORLD TRADE By Location Intra-trade industry as a component of world trade Introduction Intra-industry trade is the import and export of goods belonging to the same industry. This type of trade has increased significantly over the past years worldwide. The amount of goods transported across the sea is increasing with both imports arriving and exports leaving the port. This does not necessarily mean that countries import only what they cannot produce; import and export of goods in the same industry occur. Increasing use of containers to transport the goods has seen intra-industry trade intensifies to satisfy the growing consumer preference and taste. Theories have been developed to explain the increasing intra-industry trade, including technology based theories, new trade theories and the national competitive advantage. New trade theories These are theories of trade that try to explain the trade impact on intra-industry trade. They include the increasing return and imperfect competition. Increasing Return This is the case of decreasing cost of production in an industry in a given country. With the presence of a large population in the country that consumes a given product in the country, the demand for the product locally increases. This forms the large local market for the given product. Consumer preference for a product is mostly influenced by the consumer taste for the product as well as the cultural practice of the given country. With culture, there is a continued demand for the product generation after generation since the culture is passed over from one generation to the next; therefore ensuring a large market for the product locally. As such, the cost of production for the product decreases with increase in demand. This is due to the economies of large scale production that ensures decrease in total cost with increased production especially in manufacturing. With the large local market, the country benefits from economies of scale in production of the particular product. This gives the country a cost advantage in production of the given product, thus leading to price advantage. Pricing the product lower than other countries will see other countries prefer to import the given product than producing it. With culture, there is spread of the market globally from travelling of the people to other countries, thus the need to export the product to other countries. Enhanced transport has seen people travel far and wide to different countries. Consumer taste and preference goes a long way influencing imports in different countries. Creation of free trade will improve on imports in the country to cater for the varying consumer preference (Donnan 2013, p.3). Though there is a locally produced product, visitors in other countries may prefer the same product from their country of origin thus the need to import. This leads to intra-industry trade. The presence of locally produced goods does not stop the country from importing goods belonging to a similar industry as that of the locally produced. Imperfect competition The lack of homogeneity of products is another factor to intra-industry trade. In a perfectly competitive market, all products are assumed to be homogeneous. The cost of production is also low, thus there is free entry and exit from the market. In a perfectly competitive market, there is no need for intra-industry trade due to the production of homogenous products at a low cost. However, this is not the actual case in the market. Products are differentiated and brands created so that the market operates like an oligopolistic market. Where the cost of production is high, countries engage I production of fewer brands. This creates room for intra-industry trade through the varying demand for given brands of products. Due to the economies of scale, countries prefer producing limited variety of goods that have high cost of production. To ensure minimum cost of production, the country will produce products that have a high local demand so as to maximize on the local market. Therefore, the country can be able to export the given brand to other countries while importing other brands from other countries (Krugman, Obstefeld & Melitz 2012, p. 172). This leads to specialization in production by countries, thus the need for intra-industry trade. Technology based theories These theories explain the role of technology in intra-industry trade between countries. With technology, new methods of production as well as the product life cycle has contributed to the trade. Technology gap trade Innovation in different fields of production has seen some countries have added advantage in production over others. This is due to the application of the latest technology in production. An innovation in a given line of production will make the production process increase in speed and reduce the resources required for production. Resources are a major cost that producers aim at reducing to the minimum possible cost, thus any invention that reduces the cost of production is well accepted. The country that innovation takes place in has the technology advantage, enabling it to produce at lower cost than other countries thus becoming a major exporter of the product. Though technology is bound to spread to other countries, it takes time before other countries can adapt the technology. Countries first observe the effectiveness of the technology in production before adopting it. The cost implication of the technology may also delay the adoption by other countries especially the developing countries. As a result, one country enjoys the advantage of producing at lower cost for some time, thus dominating exports for the given period of time. After other countries start the process of adopting the new technology, the cost advantage of that country starts decreasing. This is mostly in the developed countries where the cost of labour is high, thus to minimize on production cost, they maximize on the use of technology. After all, other countries have adopted the new technology, the advantage that the innovating country had disappears. As a result, the cost of production in the country is higher than that of the developing countries. Comparing the cost of transport to the cost of local production, the country prefers to transport the product. Containerization has made the cost of transport to reduce significantly, enabling easy transport of goods across the sea (the Economist 2013, p.1). Therefore the country prefers importing the product from the developing nation than undertaking the production itself. Eventually, the country becomes an importer in the same industry it was exporting. Product life cycle Piggott and Cook (2006), discuss the product life cycle for a new product from innovation, maturity and finally standardization. Due to the technology advantage of the developed countries, most products are developed in the developed countries. The cost of labour in the developed countries is higher than the cost of labour in developing countries, thus the need to reduce on the labour intensive processes. As a result, most developed nations undertake to develop products to compensate for the high cost of labour locally. With a new product developed, the country will be able to have an advantage of the production of the product for some time soon after the innovation. This is in the first stage of product life cycle. The country will be able to export it to other countries, making it the major exporter of the product during the initial stage of the product life cycle. The cost of production is high due to the low demand during inception. After the product has received enough public attention and demand increases, the product moves to the maturity stage. At this stage, the cost of production goes down due to increasing demand, thus advantages of large scale production. Production in other countries also occurs as the firm involved in producing the product searches for the larger market. Production is carried out both locally and abroad to cut on cost of transport and evade trade barriers. Other firms may also start the production of the product thus there is increasing number of producer of the given product both locally and globally. With increased production comes the issue of competition among firms and the cost of the product goes down. This marks the beginning of the standardization stage of product life cycle. Standardization occurs when there is a widespread production of the product by different producers thus the increased supply. Just like in a perfectly competitive market, competition among firms occurs. Price competition will see firms aim at reducing their cost of production to be able to charge the lowest price possible. Production then shifts to the developing nations through foreign direct investment. This is to make use of the cheap cost of production in developing countries through lower cost of labour. Thus, eventually the country which initially invented the product will be importing the product from its branch in the developing nation instead of undertaking production locally to save on the cost of production. This explains the increasing trucks of imports transported to various developed countries like America (The Economist 2013, p.2). Division of the production process With the production process development, the mode of production has changed from the traditional raw material processing to get finished products. The phases of production have been developed to enable division of the production process in various stages that can be undertaken separately in different countries (Brackman, Garretsen, Marrewijk, and Witteloostuijn 2006, p.34).Therefore countries can undertake the production of the same product but at different stages through specialization. This leads to intra-industry trade through exporting unfinished product to other countries for finishing and later importing the finished product. National competitive advantage This refers to the advantage that firms operating in a given country enjoy over other firms operating in other countries. This determines specialization patterns in different countries. Countries with a competitive advantage in a given sector of the economy will specialize in the production of a product that it has advantages in producing. Specialization is a factor to trade as countries export what they produce and import what they cannot produce. The porter diamond explains the competitive advantage of firms operating in one country over their competitors in other countries. According to Porter (1990), there are four factors that determine the competitive advantage of a country which are factor conditions, demand conditions, related supporting industries and firm strategy, structure and rivalry. The four factors interact to create the competitive advantage that a country has over other countries. Firm strategy, structure and rivalry refer to the way operation of the firm in the country in terms of management, goals and competition from other local firms. The management system of the firm in the country plays a role in the success of firms in the country through making them globally oriented thus enabling them compete well in the international market. Goals of firms in the country will also add to the competitive advantage of the country through motivation of the workers. Competition in the industry helps the industry develop thus giving is an upper hand in the particular industry. Demand conditions are the level of demand for the product from the industry locally. High local demand creates a big market, locally thus enabling firms engage in large scale production. Apart from the local demand, the spread of demand for the product globally has seen the success of a country in production in a given industry. Thus, with demand factors, a country is able to have a competitive advantage over other countries in the given industry. Related and supporting industries refer to suppliers and other relevant industries in that country. With suppliers, firms in the industry are able to access supplies locally at a low cost and as quickly as needed due to the absence or low cost of transport. Suppliers will see efficient production take place in the industry and sharing of information enabling improvement in the production process. Factor conditions are the factors of production required for the production to occur. These include the capital resources, human resources such as labour (both skilled and unskilled), natural resources, technology and infrastructure. The more a country has more the competitive advantage of the firms in that country. For example, for the production of a labour intensive product, a country with human resource advantage will have an advantage over other countries. The arrows show the interrelation of factors in the porter diamond. With increasing local demand, the country invests more in factor conditions such as skilled labour and technology. Development of related and supporting industries stimulate growth of rivalry and the firms. All these factors in the porter diamond collectively contribute to the competitive advantage of a country over other countries. Bibliography Brackman S,Garretsen H, Marrewijk C, and Witteloostuijn A (2007). Nations and Firms in the global economy. Cambridge, Cambridge University. Donnan S, 2013. Trade into unchartered waters. Financial times, October 25, 2013. Available from: http://www.ft.com/intl/cms/s/0/4dc2ab0e-3805-11e3-8668-00144feab7de.html#axzz3KfPByv3g [6 Dec. 2014] Krugman, P., Obstfeld, M. and Melitz, M.J.,2012. International Economics, 9th edition part 1. Pearson Education. Piggott, J. and Cook, M., 2006. International Business Economics – a European Perspective. Palgrave Macmillan. Porter, M.,1990. The Competitive Advantage of Nations. London and Basingstoke: Macmillan Press. The economist. A View from the bridge. January 19, 2013. Available from: http://www.economist.com/news/finance-and-economics/21569729-what-big-american-port-says-about-shifting-trade-patterns-view-bridge [6 Dec. 2014] The Economist. The humble hero. May 18 2013. Available from: http://www.economist.com/news/finance-and-economics/21578041-containers-have-been-more-important-globalisation-freer-trade-humble [6 Dec. 2014] Read More