International trade: principles, policies, and global economic impact

International Trade - Inter- and Intra-Industry Trade Operations and the European Union

The forces of globalization emerged in the 1980s and came to affect all features of the every day life. The concept basically refers to a migration of features across borders. The transcending forces belong to the fields of economics, politics, technology and even culture. However all issues are important, a pivotal role is played by the economic modifications generated by the forces of globalization, and this is simply because a country's economy, influenced by the global context, will generate significant impacts upon the national stability and growth.

The changes brought by globalization are next to countless, but the most relevant ones in terms of economics, are the opening of borders and the liberalization of markets. These modifications led to the implementation of various classical economics principles, such as Adam Smith's suggestions of reduced political interventions within the market place or David Ricardo's theory of comparative advantages (Hunt, 2002). Most importantly however, it led to the creation of open international trade of commodities, capitals, technologies or the migration of the human resource.

The field of international trade has captured the attention of numerous scholars and proof of this stands the wide palette of writings on the issues of international trade. New features emerged and new concepts were developed. Intra-industry trade and inter-industry trade are two of these new terms. This paper is focused on presenting the two concepts and demonstrating how they apply in the cases of the trade operations conducted by the European Union.

2. Intra and Inter-Industry Trade

The specialized literature on the topic of inter- and intra-industry trade is relatively reduced, generally because the concepts are new. An analysis of the available resources will however help the reader form a better idea of the most stringent issues.

Inter-industry trade refers to the international exchange of different products, whereas intra-industry trade usually involves trade in differentiated products and intermediate goods," say Jon Kendall, Donghyun Park and Park Donghyum (1999, p.156).

Augustin Kwasi Fosu, Saleh M. Nsouli and Aristomene Varoudakis (2001, p.73) refer to inter- and intra-industry trade in simple terms. They define the concepts as follows: "Intra-industry trade refers to two-way trade in a given sector, while inter-trade industry refers to one-way trade in a sector." The authors deal with a rather niche topic on inter- and intra-industry trade, but their findings are however relevant as they present a main difference between the two concepts. In this order of ideas, they find that intra-industry trade is more beneficial for technological developments than inter-industry trade. The explanation is based on the fact that the country will better respond to imports of technology when they come from the same sector, even if another country, as opposed to different sectors, even if in the same country.

In the case of intra-industry trade, the products imported are highly similar to those already existent within the national market (generating competition and constituting substitute products), whereas with inter-industry trade, the goods belong to different categories. This then leads to the idea that the intra- and inter-industry trade models are based on different principles. Following this line of thoughts, intra-industry trade is based on the creation of economies of scale, whereas inter-industry trade is based on the principles of exchange forwarded by the theory of the comparative advantage (Forstner and Balance, 1990, p.4).

Then, another specification is that intra-industry trade requires the existence of a free international market, and this necessity is more intensely felt than in the cases of inter-industry trade. Also, intra-industry trade, given that it exchanges similar products, feels a higher need for performance, requiring as such specialization (Meyer, 1978, p.214).

Finally, the last specification refers to a similarity that the two models share - their development is based on increased specialization, which will generate positive effects upon the national economy. The effects will however differ, as Nigel Grimwade explains in his book International Trade. The author states that inter-industry specialization leads to increased real incomes. "More precisely, the country as a whole was able to move to a higher indifference curve. [...] although intra-industry specialization may equally bring lower prices and hence higher real incomes, gains from such trade come more in the form of an increase in the number of varieties of goods from which to choose" (p.72).

Intra-industry trade and the Heckscher-Ohlin model

The Heckscher-Ohlin explains several models of trade, but it cannot be applied to intra-industry trade. The explanation for this is simple: the Heckscher-Ohlin model represents a classic approach to trade, but intra-industry trade is a modern component, which does not subject to the past truths. To better understand, the Heckscher-Ohlin model sees that the forces of the industry will at most influence the relationship between endowments and trade patterns. The intra-industry trade model, on the other hand, emphasizes on the major role the industry features play and on their ability to generate trade operations, not only influence them (Forstner and Balance, 1990, p.160).

3. Inter- and Intra-Industry Trade within the European Union

Throughout the recent decades, the European Community revealed a significant increase in internal trade (both inter- and intra-industry trade). Basically, this means that the community has become focused on trading commodities among partners, rather than non-partner countries. In 1958 for instance, internal imports and exports amounted to a total of 35, respectively 37% in total trade operations; by 1992, the internal trade operations had totalled 60 and 61% in the entire international trade operations. A major force that contributed to this increase was the geographical extension of the European Community (Kahler, 1998).

With the development of the European Union, focus has been placed on inter- and intra-industry trade as this was believed to support economic integration throughout the community. The success of the endeavour is however directly dependent on the decreases and types of tariffs used by each country, but also by the availability, price and other features of competitive products offered by countries outside the EU.

The inter-industry trade between the countries in the European Union is based on the general theoretical principles and depends on the factor intensities and the factor endowments. Otherwise put, based on Ricardo's theory of comparative advantage, the European countries produce and specialize in manufacturing those items for which they possess a comparative advantage. They then exchange them throughout the European market for goods they find difficult to produce (due to resource limitations, such as lack of natural resources, commodities, technologies or skilled labor force).

The intra-industry trade within the European Union is influenced by industry features. These can be grouped into two categories - vertical differences and horizontal differences. The vertical refers to differences in product quality, whereas the horizontal refers to differences in product characteristics. This specification was necessary in a context in which the European consumers of the past recent decades began to demand more different products, rather than differentiated products; the emphasis was placed on a horizontal integration rather than vertical integration. Consequently then, inter-industry trade became dominant over intra-industry trade. There are however exceptions of countries such as Greece, Finland, or Portugal, where vertical integration is highly powerful. In these regions for instance, intra-industry trade based on quality consists 80 up to 90% of all internal trade operations (Kahler, 1998).

The table below shows the variations in intra-industry trade operations, revealing both quality and characteristics demands:

Source: Organization for Economic Cooperation and Development, 1999, p.65

Intra-industry operations are most common among the highly developed member states of the European Union and they generally represent the core of their trade operations. Inter-industry trade on the other hand occurs within the EU generally between less developed and emergent economies. The principle at the basis of intra-industry trade between highly developed EU member states is the search for perfection, specialization and superior quality. In terms of the inter-industry trade between the less developed EU members, the basic principle is that of complementarity, in the meaning of importing cross-industry products the state cannot manufacture and exporting products for which they possess better skills, commodities, capitals, technologies and so on. The combined goal of the two models is that of providing the EU consumer with a wide selection of high quality products (OECD, 1999, p.64).

4. Inter- and Intra-Industry Trade between the European Union and China

As it has been observed in the previous section, the development of the European Union has been characterized by an increase in inter- and intra-industry trade between the state members. Increases in inter- and intra-industry trade with other countries outside the Union have also occurred, but at lower rates. However, this does not mean that trade between China and the EU is insignificant. To China for instance, the European Union represents a major trading partner, with 15% of all international trade operations being conducted with this partner. The EU homologue percentage is lower. Both parties are economically powerful and the reduced amounts of inter- and intra-industry trade between them leads to future improvements and growth opportunities for both partners (Yao and Liu, 2003).

The trade relationship with China can be analyzed from both perspectives of inter- and intra-industry exchange, and major differences are available. In this order of ideas, China is characterized by low income and a scarcity of natural resources. Ergo, their trading operations are dominated by the theory of the comparative advantage, and the necessity to supply the population with complementary products. As a result then, most of China's trading operations occur at inter-industry levels. The East-Asian country possessed a comparative advantage in terms of food and beverages, crude materials or manufactured goods, but a disadvantage relative to beverages and tobacco or machines and transport equipments. The table below reveals the relative comparative advantages (RCA) of the two parties in 1998:

Source: Yao and Liu, 2003, p.186

The intra-industry trade operations of the European Union with other countries registered increases generally due to higher living standards and increasing customer demands. As a result, industries became more specialized and the trade of goods grew. The growth rate for EU - China intra-industry trade operations is however reduced. This can be explained by the large distances between the parties' geographical positions, the language and cultural barriers, but also by the discrepant development in terms of economic performances - including the levels of income: in 2008, China's GDP per capita was of $6,100, whereas the gross domestic product per individual in the European Union was of $33,800 (Central Intelligence Agency, 2009) - registered by China and the European Union.

The table below reveals the intra-industry trade ratio between the East-Asian country and the European Union, by world commodity:

Source: Yao and Liu, 2003, p.184

When analyzing the individual relationship between China and single countries, EU members, the results indicate fluctuating relationships. In this order of ideas, whereas some European countries do trade limitedly with China, others engage in massive inter- and intra-industry trading with the East-Asian country. Throughout the 1990s for instance, "the Netherlands, Italy and the UK were not able to increase their exports to China in line with the shares of world exports; Germany, France, Finland and Sweden, however, increased their bilateral trade with China to a greater extent than their shares in world exports" (Yao and Liu, 2003, p.187).

5. Enlargement of the European Union and Intra-Industry Trade

The previous sections of the paper revealed that, as the European Union expanded, the occurrence and importance of intra-industry trade operations also increased. Otherwise put, there exists a direct relationship between the developments undergone by the Union and the modifications registered by intra-industry trade operations. Given this relationship then, it could be said that the current strategy of enlarging the EU could also strive to increase the intra-industry trade. However, one must be aware, that even if this possibility exists, it is highly improbable that it constituted a major determinant in the decision made by the European Union officials for the expansions of the community.

Here are some reasons that could determine one to believe that the territorial enlargement of the European Union is, amongst other things, based on a desire to increase intra-industry trade operations:

new members would mean more liberalized markets and a better flow of products and services within the European Community the circulation of resources (commodities, technology, human resource and capitals) could also be improved, leading consequently to significant developments in the respective fields and organizations the developments made available through the access to the resources of the new member states would increase the specialization opportunities, generating higher levels of intra-industry trade the citizens of the European Union have been registering increasing income (generalized assumption and not considering the currently globalized economic challenges) and their demands have increased there is a constant need for vertical integration in the meaning of trading high quality products