Intra-industry international trade patterns and mechanisms

Intra-Industry International Trade: Benefits and Costs

Trade is brought about by specialization. People specialize in those goods and services that they can produce effectively, and since they cannot survive on only these, exchange their surplus production for other items that they need, but do not produce. There are mainly two types of trade in this regard; international and domestic. The domestic form of trade refers to the exchange of trade items (services and goods) within a country's borders. International trade, on the other hand, can be defined as "the exchange of goods and services among residents of different countries" (Chacholiades, 2006). International trade can take either of two forms; intra-industry or inter-industry forms of trade. Inter-industry trade is trade between industries, whereas intra-industry trade takes place within industries. Intra-industry trade, therefore, refers to the importation and exportation of same-industry items of trade (Gandolfo, 1998).

Background

International trade has been on the increase in recent years. This is particularly the case given that the world is now regarded a global village. In order to facilitate international trade, countries have had to significantly reduce, or even eliminate trade barriers that exist in the form of quotas and tariffs. This has been beneficial, and is seen as one of the ingredients of economic development. However, its share of costs cannot be overlooked. Dumping, resource-overutilization, welfare loss, to mention but a few have been put forward as the most significant costs of unrestricted international trade. This raises a number of questions; is free international trade really as beneficial as it seems? If yes, do these benefits accrue to everyone? If no, what then should be done to cushion those who stand to lose? It is these concerns that also form the basis of this text.

The International Trade Theory

International trade theory is one of the two branches of international economics. The other is the economics of monetary allocation (Chacholiades, 2006). The theory of international trade begins where monetary allocation economics ends; and analyzes international trade from a long-run perspective. The assumption is that money has little or no effect on the economy in the long-run. Indices such as welfare, factor rewards, consumption and prices are more useful in measuring long-run economic performance (Chacholiades, 2006). In this regard, international trade theory analyzes the impacts of unrestricted trade on prices, consumption and factor rewards; and the effect on the overall welfare of the people. This impact on economic indices can be measured through an examination of the gains and costs associated with unrestricted trade. Before then, however, it would be prudent to highlight the concept of comparative advantage.

Comparative Advantage

The international trade theory rides on the concept of comparative advantage. Economics is about allocating resources in a way that best minimizes costs, while maximizing overall profits. On the same ideology, countries use resources to produce those goods that they can produce at a low cost; and then import those whose production is disadvantageous to them, but advantageous to other countries (FAO, 2000).

The Benefits of Trade Liberalization

Economics of Scale: International trade translates to an increased market. Unrestricted international trade translates to an increased market, and reduced trade-associated costs, brought about by the removal of trade barriers such as quotas and tariffs (FAO, 2000). This implies an overall increase in the level of production, characterized by falling costs of operation. This kind of scale economies, from an industry perspective, affects individual firms in two major ways. First, internal scale economies can essentially support the introduction of cost-effective technologies such as robots, which are inefficient when used in low levels of activity (FAO, 2000). Secondly, firms enjoy huge cost-associated savings when the industry in which they operate expands (external economies). This is because an expanding industry attracts technical and financial support from third parties and other stakeholders (FAO, 2000). Economies of scale boost intra-industry trade as they enhance specialization and product differentiation, resulting in a more diversified range of same-industry trade items (FAO, 2000).

Competition-Associated Benefits: Free trade makes it easier for a country's industries to export their products to external consumers. However, in order for these products to attract adequate markets abroad, they need to meet international standards (FAO, 2000). In order to achieve this, firms have to be innovative, and have competitive advantage. Firms gain competitive advantage through low prices, high quality products, etc. The consumer, in the end, enjoys all these competition-associated benefits (FAO, 2000).

Increased Variety: Unrestricted trade, in this regard, is favorable to both national producers and consumers. Unrestricted trade implies that people have easier access to an array of products - both consumer and producer goods - that would otherwise be unavailable (FAO, 2000). Additionally, if inputs can be cheaply obtained from other countries, then countries may not have to specialize only in those areas in which they enjoy comparative advantage (FAO, 2000). If inputs that would otherwise be very costly, or even impossible to obtain, are easily obtainable, then producers could adopt niche-specialization, "and carry mutually beneficial trade in niche products of industries where trading partners also operate" (FAO, 2000).

Price Stability: free international trade makes it easier to get rid of surpluses, thereby preventing the costs associated with excess supply, and demand. In favorable periods, a country produces surpluses. These have the effect of pulling prices downwards. Since periods alternate, and are quite unpredictable, such a trend could result in significant price fluctuations, which are harmful to the economy. With facilitated international trade, "the international market may serve to dispose of these surpluses with minimum disruption of domestic prices and incomes" (FAO, 2000).

The Costs of Unrestricted Trade

Unequal Income Distribution: Free trade is considered, by critics, a way of enriching the rich. First, if production of a certain good is left to the producer who enjoys comparative advantage, then industries dealing in the same product, but in countries that are less competitive would collapse, resulting in job and welfare losses, and increased poverty (Boyes & Melvin, 2007). Additionally, unrestricted trade may drive governments to disregard worker-benefit policies in an attempt to gain comparative advantage (Boyes & Melvin, 2007).

Environmental Degradation: Unrestricted trade could, in the long run, greatly damage the environment through over-exploitation of resources. Governments could disregard environmental regulations, in an attempt to gain comparative advantage in production, resulting in over-exploitation of mineral resources, forest resources, etc. (Boyes & Melvin, 2007).

Dumping: This is whereby a country's market is dominated by low quality, cheap products; owing to the failure to enact suitable protective trade policies. Dumping is most prevalent in developing countries. These products are brought in from the developed world by unscrupulous traders and attract low-income buyers. This results in loss of consumer welfare (Boyes & Melvin, 2007).

Trade Blocs Analysis

Tariffs, quotas, to mention but a few, are barriers to international trade. They place additional costs, meant to discourage the movement of goods and services between countries, on importers. Trade blocs, however, seek to promote free trade between countries. They are formed when a number of countries come together with the aim of eliminating geographical and physical barriers of trade existing between them. The most significant forms of trade blocs are discussed below.

Free Trade Areas (FTAs): Trade barriers are eliminated, or reduced, between member countries, but each participating country maintains its own structure, with regard to trade with non-member countries (FAO, 2000). Countries enjoy sector-specific trade independence, but the issue of re-exports remains a major concern.

Customs Union (CU): Barriers are eliminated between members, but participating countries set a standard structure, which all countries have to follow when trading with non-members (FAO, 2002).

Economic Union (EU): Barriers on commodities as well as factors of production, are eliminated between members. Moreover, the participating countries harmonize other non-trade aspects such as their labor, tax and financial systems (FAO, 2000). CUs and EUs do not have to grapple with the problem of re-exports, but they significantly inhibit the independent operations of their members.

Trade creation is the most significant benefit derived from trading blocs. It refers to the trade-flow increase brought about by the elimination of trade barriers (FAO, 2000). However, trade creation is most efficient if the participating countries have comparative advantage in different areas of production (FAO, 2002). On the other hand, trading blocs could increase inefficiency, especially through trade diversion. This is whereby a member country has to import a product from another member, yet the same product could be imported from a non-member, at a lower cost (FAO, 2002).

A large number of trading blocs have been formed in different parts of the world. The European Union (EU) can, however, be considered the most significant of these. It "has had considerable impact on world agricultural markets and provides a benchmark for comparative analysis when assessing the coverage of other agreements" (FAO, 2000).

The Losers and Gainers in International Trade

Not everybody gains from international, and more so, free trade. Moreover, the gains and losses that accrue to the gainers, and losers, respectively, are not equal. This implies that some people gain, or lose, more than others do.

The Gainers: The factor owners, investors, entrepreneurs and employees engaged in those industries in which the country enjoys a high degree of comparative advantage would, to a large extent, benefit from international trade (FAO, 2000). This is so, because these industries would significantly expand; both product wise and profit wise, as a result of increased markets, and economies of scale, respectively. This expansion would then be passed on to these gainers, either in the form of higher profits, or higher wages.

The Losers: The factor owners, investors, entrepreneurs and employees engaged in the "import-competing industries stand to lose from increased trade" (FAO, 2000). This includes infant industries and those industries that may be large but are largely disadvantaged by larger industries which enjoy more comparative and cost advantages. Contrary to the gainers, these may find themselves unable to produce commodities that can compete with the low-price imports available in the international market (Boyes & Melvin, 2007). This implies that such industries would operate at a loss, and may eventually be forced out of business. It is in this regard that international trade is considered a move aimed at further enriching the rich (Boyes & Melvin, 2007).