A Inter Industry and Intra Industry Trade The Hackescher-Ohlin Model - Assignment Example

?Running Head: International Trade International Trade – EU and Intra Industry Trade A – Inter Industry and Intra industry trade – The Hackescher-Ohlin model Traditionally it has been regarded that in international trade the countries simply use to export the goods suitable for its factor endowment and technology and import the goods that it could not produce due to lack of support from its natural conditions and production factors availability (Leamer, 1995, p53). However, the new approaches are now emphasizing more towards indentifying the difference between the two type of trade including inter industry and intra industry trade and the significance and implication of each of these trade type for the world economies and international trade (Bela and Bauwens, 2010, p13). The inter-industry trade is the exchange of goods that occurs only between the industries. It usually occurs in the countries that are specialized in production. The concept of inter industry trade has been widely presented in the traditional trade theories. However, the trade economies have not turned their attention towards the concept of intra industry trade that has gaining more and more importance in the international trade scenario and its share in the total international trade have also been increasing along with time (Lawler and Siddighi, 2001, p93) On the other hand, the intra industry trade refers to the exchange of the products of the same kind of products and services between different countries. The intra industry trade could occur between the countries that have similar relative amount of factor of production whereas the inter industry trade occurs between the countries that have different production factors (Leamer, 1995, p53). Intra industry trade results in the economies of scale and allows lower cost of production while providing the customers wide range of choices. It is not focused on gaining competitive advantage. The standard industrial classifications have provided the estimated that around 25 percent of the volume of world trade has been contributed by the intra industry trade (Nigel, 2000, p71). The inter industry trade is the trade between the countries where the export and import of different types of goods and services occur between the countries. The inter industry trade us based upon the differences on the production factors held by the industries of different countries. The countries export the products that they could produce in relative large amount due to intensive capital whereas they import the products that they could not produce themselves due to lack of intensive capital and production factors required for the production of these products. The inter industry trade does not include the exchange of goods between the countries in the same classification (Bela, 1981, p1109). The intra industry trade on the other hand refers to the trade of the goods and services of the same classification between the countries. The products of same classification are exported and imported by the countries in the process of intra industry trade. The notion of intra industry trade is based upon the economies of scale and similarity of the production factor endowment. The intra industry trade is lead by different factors for instance, the countries use to important a product in some season and then export the same product in another season during which they could product it abundantly. Similarly, some countries export a product from one border and at the same time it import the same product at another border due to the cost involved in the transportation of these products within the country from one end to another (Aquino, 2000, p275). The intra industry trade focuses upon the economies of the scale because it proposes the import of the goods from the other countries they could be manufactured at home but their production cost would be greater at home and from other countries the same products could be attained at comparatively lower rates. The world community is witnessing growing importance of the intra industry trade at international level because the attention of the trade economists has been turned towards this type of trade that gives more choices to the consumers focuses upon the economies of scale (Lawler and Siddighi, 2001, p93). The industries countries of the world remain involved in the intra industry trade because high volume of products and services are imported and exported by these countries with the others having same relative volume of factors of production. The volume of the intra trade depends upon the amount of labor, capital and technology associated with the industries. The industries equipped with relatively large volume of technology, skilled labor and capital use to have more volume of intra industry trade as compared with other industries have these elements in lesser amount (Charles, 2002, p121). If the relative amount of labor, capital and technology is same in different countries then these countries get involved in the intra industry trade. The intra industry trade places wide range of option in front of the consumers because due to intra industry trade there is large variety of goods made available in a country that can produce (Bela and Bauwens, 2010, p13). The difference between the inter industry and intra industry trade basically stems from the classification of the traded goods. In the inter industry trade same products are not exported and imported by the country but it exports one product and imports the other. The intra trade however, involves both the import and export of the same classification of the products between the countries. The inter industry trade is based upon the factors of competitive advantage whereas the intra industry trade focuses upon the economies of scale and gives consumers access to wide variety of products by allowing the import and export of same goods with the other countries (Bela, 1981, p1109). The traditional trade theories merely focus upon the perfect competition and competitive advantage hence these theories could better explain the concept of inter industry trade involving the import and export of homogeneous products between the countries (Aquino, 2000, p275). The theory of competitive advantage formulated by David Ricardo (1817) also emphasis upon inter industry trade. Their theory suggested that the movement of goods across the borders is easier than the movement of resources like land, labor and capital due to which countries export and import goods on the basis of their capabilities and production factors endowment. The concept of inter industry trade is based upon the assumption that all the countries of the world are different in terms of their production capabilities and resources and they tend to achieve competitive advantage over the others on the basis of the differences in their patterns of production of goods and services (Charles, 2002, p121). Since, the traditional trade theories are mostly based upon the element of competitive advantage, there is little room for the intra industry trade in these theories however; the theorist soon started realizing the implication and importance of intra industry trade with the international trade theoretical framework. Lancaster (1980) explains that large scale intra industry trade between different industrial countries has been evolved as a complex phenomenon not addressed by the traditional trade theories (Davis, 1995, p201). It implies that the traditional theories of international trade were not giving due emphasis upon the large trade volume occurred between the countries having similar production factors. The New Trade theory presented by Paul Krugman argues that the economies specialize in the production of different goods so that they could be able to take advantage of increasing returns. Unlike the traditional approach Krugman’s theory proposes that the economies do not follow the differences in the regional endowment and specialize in limited variety of production to avail the benefits of economies of scale in terms of increasing returns (Krugman, 1991, p211). Though the Hackescher-Ohlin model explains the concept of intra industry trade but it is also unveiled that this model is merely based upon the concept of competitive advantage and does not explicitly explain the concept of intra industry trade because it is less focused upon the elements like economies of scale and other reasons behind the exchange of goods between the countries. The Hackescher-Ohlin model also explains the concept of inter-industry trade (Menon and Dixon, 2010, p165). The model proposes the concept of capital abundant and labor abundant economies and their trade relations. According to the model, the capital abundant domestic economies specialize in the production of the capital intensive products and then export these products to the foreign economies whereas the labor abundant foreign economies specializes the product of the labor intensive products and then export these products to the domestic economies (Bela, 1981, p1109). The gains attained through the inter industry trade could be viewed in terms of competitive advantage because the capital abundant domestic economies become the net exporter of their capital intensive products (Bela and Bauwens, 2010, p13). The Hackescher-Ohlin model explains that the income distribution tends to have effects upon the inter industry trade but the intra industry trade takes no income distribution effects. Hence it is unveiled that the Hackescher-Ohlin model attempted to elaborate the concept of intra industry trade but failed to do so because it is similar to the traditional approach towards international trade and lacks due attention towards the dynamics and growing role of intra trade at international level. B – European Union and Inter Industry and Intra industry trade The international trade patterns have been going through transformational changes in response to the formation of different geographical and trade alliances, agreements and unions. The occurrence of inter industry and intra industry trade has strongly affected the patterns of international trade in different regions and countries of the world. Likewise, the trade diversion and trade creation within European Union has also been affected from the patterns of inter industry and intra industry trade practiced by the EU countries over the last few decades (Ferto and Soos, 2006, p98). It has been unveiled from the statistics that the high volume of trade has been redirected towards the European Union Countries over the last decades that indicate the implication and extent of inter and intra industry trade within EU trade patterns. The implication of inter industry and intra industry trade for EU could be well understood through the analysis of its trade patterns with the Central Eastern European Countries (CEECs) (McCorriston, 1998, p213) In 1990s, there were some radical reformed introduced in the economic system of Central Eastern European Countries (CEECs) after which it directed the major share of exports to the EU due to which significant increase has been recorded in the trade volume of EU. EU has now become the major trading partner of CEECs countries. As a result of these developments the inter industry trade account for nearly 50 percent of trade for the EU10 group of countries. The volume of IIT was increased from 42% in 2000 to 51% in 2007 that indicate growing role of IIT in determining the trade patterns of EU (Ferto and Soos, 2006, p98). There has been several research studies conducted to find out the extent of intra industry trade in EU. Before the economic transformation occurred in CEECs the volume of IIT coming to the EU countries was very low from the CEEC however, the early years of economic transition show positive signs of rapid growth of IIT between CEEC and EU. Gacs (1994) observes the increase in the trade of Hungary with the EEC that increased from 40 percent in 1980 to 53% in 1992 (Gacs, 1994, p6). Later Kaminski (2001) recorded that there is rapid increase of IIT volume in EU (Kaminski, 2000, p457). The reduction of the trade barriers also played vital role in this scenario and the inter industry and intra industry trade was facilitated that ultimately result in strengthening the role of inter and intra industry trade in European Union. However, the response of different EU countries towards these transformations was different from each other in terms of the difference in the share of IIT in their total trade volume. The table shows the volume of inter industry and intra industry trade in EU from 2000 to 2007 (Elzbieta, 2009, p17). Source: Elzbieta, 2009, p16 It has been found that the intra industry trade has been commonly practiced by the countries included in the European Union that has made intra industry trade an important feature of the EU trading scenario. Due to this reason the volume of intra industry trade in EU was also increased over the last decade (Elzbieta, 2009, p16). The following table shows the intensity of intra industry trade of EU countries from 2000-2007. Source: Elzbieta, 2009, p16 It is also found that the volume of IIT differs within UE from country to country and despite the overall increase in the volume of IIT some countries have also show low progress in IIT as compared with other EU countries. For instance, Czech Republic was leader of IIT increase in 2000 because it grabbed 51 % share of IIT but in other EU countries like and Cyprus the IIT share is as low as 16-17 percent. Some other EU countries like Bulgaria and Romania have also shown little sign of rapid increase of IIT with 32% and 33% respectively (Elzbieta, 2009, p17). The following table shows that the IIT volume was increased in EU but some countries still recorded decline in the share of IIT in their total trade volumes Source: Elzbieta, 2009, p17 The rise of IIT in EU during the time period of 2000-207 was mainly contributed by the trade liberalization policies; however, it is also a fact that during the 1990s also there was considerable rise in the share of IIT in the total trade volume. At that time, the main reason behind the increase in IIT was legal adjustment and integration in to EU 15. The rise in the volume of intra industry trade also accounted for the rise in the foreign direct investment because the EEC countries were allowed access to the EU markets where they invested to learn about the capital and distribution channels. It is also found that most of the IIT increase in EU was contributed by the vertical intra industry trade due to the specialization on the production of the products having low level of quality standards. The countries were mostly focusing upon the export of low quality product while showing their interest in the import of high quality products. As a result in many of the EU countries including Hungary, Latvia and Lithuania there was rise in the low quality VIIT whereas the share of high quality VIIT was comparatively low. However, after that there was gradual change observed in the situation and the share of high quality VIIT was also increased in the EU countries including Cyprus, Czech and Malta etc (Elzbieta, 2009, p15). The following chart illustrates the change in the pattern of high and low quality products intra industry trade in EU. Source: Elzbieta, 2009, p21 As a result of this development, it was found that the patterns of VIIT were significantly improved in EU and along with the rise in IIT the rise in high quality VIIT was also recorded. Moreover, this change also accounted for the positive effects upon the production specialization and trade in EU as these countries become able to get involved in the specialization of advanced and high quality level products. Hence, it is unveiled that the trade patterns of EU always remain dominantly contributed by the intra industry and inter industry trade however the reforms and trade liberalization measures have contributed towards significant rise in the share of intra industry trade in EU (Elzbieta, 2009, p15). C – EU Enlargement and Need for IIT expansion The process of expansion of the European Union has posed some very serious challenges. After the inclusion of Bulgaria and Romania in 2007 the EU has now 27 members. On one hand, the enlargement of EU has brought increased and improved trade and investment opportunities to the countries of EU but at the same time the challenging situation demands the careful revision of the trade policies so that the existing patterns of intra trade could meet the demands of enlarged Europe. The enlargement of European Union after going through several stages of expansion is illustrated as below Source: http://www.bundesregierung.de/ Due to the enlargement of EU, the population of the Union has also increased and ultimately EU has evolved as the largest multi country single market of the world. The trade liberalization policies being formulated and implemented by EU have drawn significant impacts upon the trade patterns of these countries and over the last few years there is considerable improvement and increase observed in the trade activities of the EU countries. In the absence of proper supervision of the trade policies it would not be possible for the countries of EU to reap the benefits of the EU enlargement and they would be able to avail just small proportion of the positive economic impact of the element (Kramer, 1999, p40). The EU countries at present are also practicing intra industry trade that could be seen in the record of IIT indices of individual EU-15 countries in their mutual trade. Source: Elzbieta, 2009, p36 The expansion of EU has resulted in increased competition because some new economies have entered to challenge the old economies. The slow growing economies are facing high competition from the fast growing economies and in this situation there is essential need of introducing some reform and policies that could work for the expansion of the intra industry trade and ultimately the countries would become able to further exchange goods and services and become able to avail the benefits of economies of scale (Kadar, 1997, p104). Moreover, the new and slow growing economies also require expansion of IIT because it will bestow them high FDI and they will also get the opportunities to lean advances production and business patterns from the stable and fast growing European Union member’s economies (Dingsdale, 1999, p153). The enlarged European Union has much more economic demands and expectations as compared with the older one because the expanded EU market has more population and labor that requires more opportunities to continue their economic progression. The situation requires momentum in the intra trade activities so that the requirements of the population could be met and new employment and work opportunities could be created for the EU work force. At the same time, the increased demands of the consumers could also be met through increased volume of intra trade because it allows the entry of wide variety of products and in the end there would be greater choices in front of the consumers regarding the selection of different products. It is found that the intra industry trade has evolved as the driving force of the trade development of the countries of the European Union. During the last decade the importance of intra industry trade has become vital factor behind the economic growth because the increased competition require the countries to offer wide range of products while availing the benefits of the economies of scale (Croft et al, 1999, p21). The role of IIT has been increasing in the economies of the EU countries but still there is need of creating more opportunities for IIT because many of the countries of EU require more advanced and beneficial type of trade where they could also get the chances of industry specialization along with the exchange of goods and services (Dohrn, 1996, p113). The enlargement of EU is expected to draw significant impact upon the existing trade patterns of EU because the new entries have expanded the marker and flow of FDI and goods and services between the countries has also increased. The current trading relations of the older EU members with the new entries are needed to be modified in order to comply with the trading principles set out by EU. The exchange of goods between the EU members has made much easier through the implementation of lower tariffs and taxes however, there is need of further flexibility in the trade rules so the countries could get involved in intra industry trade more often. It would not only generate more competition among the countries of EU but at the same time, the EU market would become stronger in the international trade scenario. The intra industry trade is also needed in the enlarged European Union to provide enduring support to the economies of the EU countries because the intra industry trade allows changing the productions structures by adopting advanced means and processes. This is necessary for the new members especially because they have to improve their economic structures in order to make them more similar to the already developed economies of EU (Kirby, 1998, p73). The development of IIT also allows the new members of the EU to easily adjust in the internal market of the EU by following a smooth system while they are not required to reallocate the resources between their industries (Maresceau, 1997, p82). The entire discussion could be sum up with the conclusion that intra industry trade has become an integral part of the international economics and trade system. The intra industry trade is based upon the principle of economies of scale due to which it is gaining rapid popularity all over the world. The member countries of the European Union also require the increased trend of IIT because the economies of EU countries could be strengthen through increased practice of IIT. The enlargement of the European Union further requires increase in the IIT so that new members in the expanded European market could avail be benefits of the EU enlargement by using IIT as a tool of accelerating the pace of economic development. 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