Chris Milner

UK INTRA-INDUSTRY TRADE WITH THE EU NORTH AND SOUTH

The empirical literature on intra-industry trade (IIT) is extensive, embracingmulti-country and multi-industry analyses as well as country specific andindustry specific studies. However, this literature has failed to throw up awholly conclusive set of determinants. A number or reasons have beenoffered for this empirical fragility. Torstensson (1996) emphasizes measure-ment and sample selection problems and specification issues. Hummels andLevinsohn (1995) focus on country specific effects. A number of authorspoint to the difficulty of linking empirics to a specific model given that thereare many different models offering alternative explanations of IIT inhorizontally and vertically differentiated goods (see for example Bergstrand,1990). Besides more robust measures of explanatory factors and recognitionof country specific influences, we need to refine the measures of differenttypes of IIT to facilitate more direct testing of theories of IIT.This study is country specific in that its focus is the UK’s bilateral IITwith its European Union neighbours.

Vertical and Horizontal Intra-Industry Trade: An Analysis of Country-and Industry-Specific Determinants

As discussed in Chapter 2 of this book, much theoretical effort has been expended in explaining the circumstances in which intra-industry trade (IIT) will arise. Besides a range of country-specific determinants this work has shown that scale economies, product differentiation and imperfect competition are typically important. Although the empirical work also confirms that IIT levels vary with market, production and product characteristics across industries, the results show a degree of inconsistency across studies.

Intra-Industry Trade and the C-H-O Model: Evidence and Implications for Adjustments

By the late 1980s many of the basic issues relating to modelling the determinants of intra-industry trade appeared to be resolved. There was a core theoretical foundation which offered a widely accepted explanation for intra-industry specialization and two-way trade in horizontally differentiated goods. In its single-sector form (Krugman, 1979) it offered a pure non-H—O explanation of such specialization and exchange between identical economies, based upon individuals’ preference for variety and the existence of decreasing costs in production. The subsequent incorporation of both H—O and non-H—O sources of trade into a general equilibrium framework (Helpman, 1981; Helpman and Krugman, 1985) allowed for inter-industry specialization in homogenous goods and intra-industry specialisation in horizontally differentiated goods, and is often referred to as the Chamberlin—Heckscher—Ohlin (C—H—O) model. Thus a theoretical coherence was provided for the contrast between ‘new’ and ‘old’ (factor endowment) explanations of trade. Interest was also generated in the opportunities created by this ‘new’ type of model for affecting the pattern of comparative advantage through the strategic use of trade and industrial policies.

What have we learned from a generationÂês research on intra-industry trade?

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.

Effective Protection Analysis and Optimal Trade Policy with Intra-Industry Specialisation and Imperfect Competition

The effective tariff concept is well established in the theoretical literature in the analysis of inter-industry trade flows. This analysis is based upon assumptions such as product homogeneity, non-increasing returns, arms-length trade, and small open economy conditions. Relaxation of some or all of these assumptions has direct implications for effective protection analysis under any type of trade flows.1 As is now widely recognised however, relaxation of these assumptions is also likely to be associated with intra-industry specialisation and exchange. There is a large literature on the effects of nominal tariffs in this context.2 There is, by contrast, a paucity of studies on effective protection in the context of intra-industry trade.3 This chapter, therefore, seeks to redress this balance, and to employ effective protection analysis under conditions of ‘within-industry’ specialisation (horizontal and vertical) and of imperfect competition.