Intra-industry trade

Intra-industry trade refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported.

Examples of this kind of trade include automobiles, foodstuffs and beverages, computers and minerals.

Europe exported 2.6 million motor vehicles in 2002, and imported 2.2 million of them. Japan exported 4.7 million vehicles in 2002 (1 million of which went to Europe, and 2 million to North America), and imported 0.3 million.

Why do countries at the same time import and export the products of the same industry, or import and export the same kinds of goods?

According to Nigel Grimwade, "An explanation cannot be found within the framework of classical or neo-classical trade theory. The latter predicts only inter-industry specialisation and trade". However, this is far from the case.

The traditional model of trade were set out by the model of David Ricardo and the Heckscher–Ohlin model, which tried to explain the occurrence of international trade. Both models used the idea of comparative advantage and an explanation of why countries trade. However, many economists have made the point of claiming that these models provide no explanation towards intra-industry trade as under their assumptions countries with identical factor endowments would not trade and produce goods domestically. Hence, as intra-industry trade has developed many economists have looked at other explanations.

One attempt to explain IIT was made by Finger (1975), who thought that occurrence of intra-industry trade was “unremarkable” as existing classifications place goods of heterogeneous factor endowments in a single industry. However, evidence shows that even when industries are disaggregated to extremely fine levels IIT still occurs, so this argument can be ignored.

Another potential explanation is provided by Flavey & Kierzkowski (1987). They produced a model that tried to get rid of the idea that all products are produced under identical technical conditions. Their model showed that on the demand side goods are distinguished by the perceived quality of that good and high quality goods are produced under conditions of high capital intensity. However, this explanation has also been dismissed. It is questioned whether the model applies to IIT at all, as it does not address directly trade between goods of similar factor endowments.

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