MODERN INTERNATIONAL TRADE THEORIES

1. CHAPTER 5 MODERN INTERNATIONAL TRADE THEORIES

2. Modern IT Theories • New Development of IT (after War II) • The relationship of modern IT theories • Intra-industry trade • Economies of Scale & Imperfect Competition • Dynamic theories of IT

3. New Development of IT(after war II) • Rise of Intra-industry Trade • Increase in Trade among Industrialized Countries

4. Cloth Rice China Inter-sector Trade Intra-sector Trade USA Cloth Rice Rise of Intra-industry Trade exchange products which belong to the same sector

5. Increase in Trade among Industrialized Countries • According to classical trade theory,the difference of countries lead to IT;the bigger the difference, the more trade possibility • After 60s,the “North-North Trade” exceeded the “North-South Trade”

6. North-North Trade From the 60s to the 80s, trade between industrialized countries rose from 45 to 55% of world trade.

7. Relationship Imperfect competition Pure Competition Imperfect competition Intra-industry trade Economies of scale Constant return of Scale Economies of Scale Assumptions of H-O Unchanged Technology Product Cycle Theory Technology Transformation Government Interference Trade Policy & Trade Barriers Free Trade Integration Theories about Integration

8. Intra-industry Trade • Definition • Trade in which a country exports and imports in the same industry • In contrast to inter-industry trade. • Measurement • Explaining intra-industry trade • Pattern and gains of IIT • Summary for IIT

9. Measurement • Economists usethe Grubel-Lloyd (GL) indexor Intra-industry Trade（IIT）index to measure the degree of intra-industry trade in an industry. • X and M respectively represent the export and import value in an industry (or the same kind of products).

10. X X M M X M IIT=1 IIT=0 IIT=0.5 GL index (or IIT index) • IIT index falls between 0 and 1 • If a country only export or import this kind of product, IIT＝0, i.e. no intra-industry trade. • If IIT>0，it means the country export and import this kind of products at the same time (intra-industry trade). • The larger IIT index is, the more popular the intra-industry trade is. When X=M, IIT=1.

11. GL index of a country The intra-industry trade index of a country is:

12. 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 IIT index (or GL index)of selected countriesunit:%

13. Increasing importance of intra-industry trade

14. Explaining intra-industry trade • love for variety • Internationalization of production • Intra-firm trade • Reciprocal dumping (economies of scale) • Other explanations

15. Love for varieties

16. Love for varieties

17. Internationalization of production

18. Intra-firm trade • INTRA - FIRM TRADE: trade within the same firm but located in different countries. • Example: Toyota ships cars or car parts from Toyota Japan to Toyota USA. Still its value is recorded as import of the USA. The US consumers or the government do not make choice about value or quantity of this import. This decision is based on the cost calculation made internally by TOYOTA (“global firm”).

19. Reasons for Intra-firm trade • Cheap transportation • Fast, internet - based information. • Intra-firm pricing (“transfer pricing”). • Development of own distributorships

20. Example • A computer ordered by you at Dell through e-mail are put into production in four hours in Taiwan and shipped by air to the USA in 12 hours. A computer built to your specification is on your desk in less then three days. The Taiwanese export is an intra-firm trade. • Dell imports your computer to the USA in few parts which are easy to assemble at the USA Dell plant.

21. Example • The parts are low priced so the import tariffs on them are very low. The computer is put together in few minutes and Dell “adds value” at home by basically repackaging it before shipping to you. • The result is that you have cheap product. • Dell has high profits because they “add value” in the USA, so Dell stock sells like hot cakes. • Taiwan has jobs.

22. Example • Low cost intermediate goods - buying through foreign subsidiary may be cheaper. Mexican firms gets assembly parts from Japan and sends TV’s to the US under NAFTA rules. • Own distributors lowers the markup of independent firms. • The transfer price - firms price assembly parts internally below cost to pay lower tariffs and taxes and add value at the fully owned assembly subsidiary.

23. Reciprocal Dumping • Example • Two countries: USA & Japan • Two goods: car & truck • Identical technology、factor endowments and demand preference. • The basic reasons for this kind of IIT is economies of scale, we will discuss this topic in details later.

24. USA & Japan PC PT 2 2 Autarky LACc LACT QC QT PT PC 2 Trade 2 LACT LACC 1.5 1.5 Export to Japan Export to USA QT QC

25. Other explanations • No Puzzle: Pure Categorical Aggregation • As an empirical matter, IIT does fall with disaggregation. • Seasonal trade, Entreport

26. Pattern and Gains of IIT • Horizontal IIT vs. Vertical IIT • HIIT: intra-industry trade in horizontally differentiated products (products differentiated by attributes) • VIIT: intra-industry trade in vertically differentiated products (products differentiated by quality) • Gains • Economies of scale lead to low costs and low price. • Consumers enjoy differentiated products.

27. Summary for IIT • Trade need not be the result of comparative advantage. Instead, it can result from imperfect competition and increasing returns; • Trade may divided into two kinds:intra-industry trade & inter-industry trade; • Intra-industry trade benefit producers and consumers.