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Intra-Industry Specialization and the Pattern of Trade*

Published online by Cambridge University Press:  07 November 2014

Herbert G. Grubel
Herbert G. Grubel*
Affiliation:
University of Pennsylvania
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Extract

In recent years some economists have suggested that under a wide range of circumstances free international trade will result in a situation where each country simultaneously produces, exports, and imports products which are very close substitutes for each other in consumption, production, or both. Because of the similarity of these products they are commonly accounted for in the same statistical “industry” classification, and the resultant international pattern of production and trade can conveniently be described as “intra-industry specialization” as contrasted with “inter-industry specialization” which results when countries produce and export but do not import the output of some industries while they import but do not produce or export the output of some other industries. It was considered that in the European Common Market intra-industry specialization dominated over inter-industry specialization and that similar developments were important in the development of Benelux trade. At the same time, but independently from these two suggestions in the literature, two pieces of research produced models capable of explaining which country would tend to specialize in which of the different qualities or styles of commodities making up the international trade in products of the same industries.

Cet article établit empiriquement que les réductions de tarifs douaniers entre les pays de la Communauté Economique Européenne entre 1955 et 1963 ont provoqué une expansion du commerce entre les pays membres surtout via l'échange de produits généralement considérés par les économistes et statisticiens comme appartenant à la même industrie, plutôt que via des échanges de produits sortant d'industries différentes.

L'analyse théorique tente d'expliquer ce phénomène. Dans le cas de produits parfaitement homogènes, le phénomène peut être attribuable à l'existence des coûts de transport dans le cadre de l'analyse traditionnelle d'Heckscher-Ohlin ou à des caractéristiques techniques spéciales comme on en rencontre dans la production et la distribution de l'électricité, les services de transport international, et la vente conjointe de produits incluant les services bancaires et d'assurance. On a jugé cependant que le phénomène était en bonne partie attribuable à l'échange de produits d'industries opérant dans des conditions de concurrence imparfaite et produisant des biens non-homogènes comme ceux dont traitent les théories de Chamberlin et Robinson.

Dans le câdre de ces modèles, l'article analyse les réactions des producteurs à l'entrée sur leur marché de substituts étrangers dont le prix baisse subitement à cause de la réduction du tarifs douanniers. On a trouvé que la publicité et une spécialisation plus poussée peuvent entrainer une interpénétration considérable des marchés autrefois dominés par les producteurs autochtones.

Une autre partie importante de l'analyse théorique traite de la possibilité de prédire ex ante lesquels des produits non-homogènes sont produits dans chaque pays. Dans des conditions de coûts constants et croissants, le modèle de Heckscher-Ohlin peut expliquer la structure de spécialisation. Dans le cas de coûts décroissants, l'analyse se fonde sur les modèles de Linder et de Dreze pour expliquer la spécialisation vers des produits non-homogènes par la qualité d'une part et le style d'autre part.

La conclusion principale de l'article est que l'abolition réciproque des barrières douanières crée moins de problèmes d'ajustement que la majorité des observateurs le croient parce que industries manufacturières ont tendance à réagir à l'abolition des tarifs comme des producteurs en concurrence monopolistique, de sorte qu'il n'y aura en fait que des pertes de capital minimes pour les travailleurs et des détenteurs de capital attribuables à la différentiation de qualité ou de style.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 33 , Issue 3 , August 1967 , pp. 374 - 388
Copyright
Copyright © Canadian Political Science Association 1967

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Footnotes

*

This paper was written with financial assistance from a Rockefeller Foundation research project in international economics at the University of Chicago. Harry G. Johnson, the director of the project, helped me with valuable criticism and suggestions. The paper has also benefitted from comments made by members of the international trade workshop at the University of Chicago and the University of Pennsylvania, especially R. A. Mundell, A. I. Bloomfield, and I. Kravis.

References

1 See Balassa, B., “European Integration: Problems and Issues,” American Economic Review, Papers and Proceedings, 05 1962 Google Scholar and Balassa, B., “Trade Liberalization and ‘Revealed’ Comparative Advantage,” Manchester School, 05 1965 Google Scholar; Verdoorn, P. J., “The Intra-Bloc Trade of Benelux,” in Robinson, E. A. G., ed., Economic Consequences of the Size of Nations (London, 1960).Google Scholar

Since completion of this study B. Balassa has published the note: “Tariff Reductions and Trade in Manufactures,” American Economic Review, 06 1966 Google Scholar, in which he presents empirical measures very similar to my own, with his findings reinforcing mine. However, Balassa does not present a theoretical anaysis of the phenomenon of intra-industry specialization as I do in this paper.

2 Verdoorn, “The Intra-Bloc Trade of Benelux.”

3 Linder, S. Burenstam, An Essay on Trade and Transportation (New York, 1961)Google Scholar; Dreze, Jacques, “Les Exportations intra-C.E.E. en 1958 et la position belge,” Recherches économiques de Louvain, XXVII, 1961.Google Scholar

4 The data used in this study include seventy-four industries, from class 511 to class 899, taken from OECD Statistical Bulletins, Foreign Trade, Trade by Commodities, various issues.

5 For the purposes of the present analysis it is not necesary to identify the industries in which certain countries should specialize, given their resource endowments, for the interest is only in whether such concentration has taken place or not.

6 This same kind of reasoning about the relation of relative shares and comparative advantage has been used by Liesner, H. H., “The European Common Market and British Industry,” Economic Journal, 06 1958, 302–16CrossRefGoogle Scholar, and by Balassa in “Trade Liberalization and ‘Revealed’ Comparative Advantage.”

7 Division by zero would have been necessary 10, 0, and 10 times and ratios could not be formed because of unavailable statistics 17, 17, and 28 times in the years 1955, 1958, and 1963 respectively.

8 The actually observed decline in the average value of the ratios and the reduction in the variances in Table I (often statistically significant) are puzzling and must await further research.

9 R. A. Mundell has suggested that the excess increase in the trade in “manufactures” over “raw materials” may be due to the differences in the tariff levels of the two categories since the initially higher rates on the manufactured articles were lowered more absolutely than those on raw materials by an across-the-board cut of equal percentage points. I was unable to quantify this effect and consider the above results worth reporting because the differences in the rates of increase in the two categories is rather too large to be explained completely by the differential tariff effects and because the other evidence and analysis presented in this paper suggests the view that intra-industry specialization has been significant.

10 For a review of this literature see Caves, R. E., Trade and Economic Structure (Cambridge, Mass., 1st ed., 1960), 178–82Google Scholar and Johnson, H. G., “International Trade Theory and Monopolistic Competition Theory,” in Monopolistic Competition Theory, Studies and Impact, Essays in Honor of E. H. Chamberlin, in press.Google Scholar

11 For an analysis of these factors see Kravis, I., “Availability and Other Influences on the Commodity Composition of Trade,” Journal of Political Economy, 04 1956.CrossRefGoogle Scholar

12 See Keesing, D., “Labor Skills and Comparative Advantage,” American Economic Review, Papers and Proceedings, 05 1966, 244–58.Google Scholar

13 See Verdoorn, , “The Intra-Bloc Trade of Benelux,” 346 Google Scholar, where the author argues that differences in the length of production runs may be more important than differences in the size of plants in explaining the excess of United States over European productivity.

14 Under certainty and in the absence of transportation costs in the long run the production of the product would be shifted to Country I. However, uncertainties and the cost of transporting the product to Country II where most of it is consumed are factors which in the real world are likely to prevent production in Country I. In line with our earlier analysis, Country I is likely to be expanding its own output in another product which is less competitive with the one in which Country II has the initial advantage. It should be noted that under these circumstances the market solution for the newly formed customs union may not be Pareto-optimal.

15 Linder, An Essay on Trade and Transportation.

16 “Les Exportation intra-C.E.E. en 1958 et la position beige.”

17 I have tried to test the Linder model in a modified form. Considering unit values of commodities as a proxy for quality, I sought to explain the different unit values of a country's imports of a given industry by the per capita income of the country from which the import originated. More precisely, the null hypothesis was that there should be a positive correlation between the unit value of imports of country i from countries j … n, and the per capita income of countries j … n. None of the regressions covering the EEC countries and the three-digit industries discussed in the first part showed a statistically significant relationship of the nature hypothesized.

18 See Galbraith, J. K., The Affluent Society (Boston, 1958)Google Scholar; Packard, V., The Hidden Persuaders (New York, 1957).Google Scholar

19 For a proposal along these lines see Pinder, J., “The Economic Meaning of the Commonweath,” Moorgate and Wall Street, Spring 1966.Google Scholar The US Trade Expansion Act was designed to liberalize trade in products in which the developed countries of the Atlantic Community dominate world trade overwhelmingly. Tariff reductions in these products applied on the most favoured nation basis would in fact exclude the less developed countries from any benefits from this liberalization. In the framework of our model such behaviour can easily be explained by the relative ease of adjustment expected as a result of intra-industry specialization among countries at similar stages of development. For a discussion of the issues surrounding the most favoured nation clause of GATT and discrimination possible under it, see Johnson, H. G., U.S. Economic Policy towards the Less Developed Countries: A Survey of Major Issues (Washington, 1966), esp. chap. 1.Google Scholar