INTRA-INDUSTRY TRADE: THE PAKISTAN EXPERIENCE

BYS H A Z I A P I TA F IN A I N AU Z A I R A H M E DA M B R E E NM A H N O O R A S L A MA B D U L L A H B A R K AT U L L A H

INTRA INDUSTRY TRADE DEFINED

The simultaneous exports and imports of a product within country or a particularindustry called intra-industry trade (IIT) or two-way trade.

BENEFITS OF INTRA INDUSTRY TRADE:

o increases the variety of products the same industry, which is beneficial to both, businesses, as well as consumers.

o benefit from the economies of scale, as well as use their comparative advantages (In other words countries will get more economic benefits if they concentrate on producing specific types of products within specific range, according to their comparative advantages rather than producing all ranges of specific products.).

o  assists the economy in cases of short-term economic fluctuations.

DISADVANTAGES OF INTRA INDUSTRY TRADE :

• if the quality of imported one is high or its price is relatively low then in long run your industry would suffer.

PRE REQUISITE TERMINOLOGY FOR THE ARTICLE 

1. liberalizing the international trade :

the removal or reduction of the restrictions on the international trade i.e. decreasing custom duty, tarrifs etc so that the trade may be easy.

2. OECD countries : organisation for economic cooperation and development (an association among some countries )

CONT:

3. commercial policy :

(also referred to as a trade policy or international trade policy) is a set of rules and regulations that are intended to change international trade flows, particularly to restrict imports

4. .import substitution : reducing the foreign imports by domestic production

Neo-Chamberlinean model: consumer have similar prefrences for different varieties of goods.

Neo-hotelling model: consumer do not have similar preferences for different varieties of goods.

CONT :

5. Cournot competition : in which competing firms that make the same homogeneous and undifferentiated product choose a quantity to produce independently and simultaneously.

6 .  reciprocal dumping : the sales by firms from two countries into each others market at prices below that each charges at home .

7. Foreign direct investment: controlling ownership in business enterprise in one country by an entity based in another country.

INTRODUCTION : Verdoorn (1960), Balassa

(1966):

became aware that certaindeveloped countries exported and imported in the same product categories

Grubel and Lloyd(1975) :

developed the most popular index for measurement of intra-industry trade

Helpman and Krugman (1985) synthesized the various attempts to model IIT

Helpman analyzed theOECD countries and tests some hypotheses of the model of Helpman and Krugman (1985).His results were according to the theory.

CONT :

Hummels and Levinsohn (1995) continued the work of Helpman (1987). The authors analyzed the results for all OECD countries and then extending to test non-OECD countries with panel data The results have questioned at least partially, the findings obtained by Helpman (1987)

They used three estimaters OLS, Fixed effect and Random effects

INTRA INDUSTRY TRADE AND PAKISTAN

o Followed import substitution policy for increasing industrialization which was highly supported by increased tarrifs , and taxes.

o Joined two regional trading blocks that is SAARC and ECO ( economic cooperation organization)

LITERATURE REVIEW

• Similar countries have little reason to trade( H-O model )

• Horizontal IIT Model

• Vertical IITT Model

HORIZONTAL IIT MODEL

o Same stage of production

o Consumers have similar preference

o Incorporate transport costs and the reciprocal dumping

VERTICAL IIT MODEL o The quality is assumed to be directly related to the capital-labor

ratio

o A capital-rich country is likely to produce higher-quality products; while a labor-rich country is likely to produce lower- quality products.

o The unequal income is assuming a source of the demand for variety of vertically differentiated products, a larger difference in income will increase the share of vertical IIT.

SHAKED AND SUTTON 1984

o Demand for each quality of the product depends on the distributionof income.

o Firms face three-part decision process – entry, quality and price.

CLARK (2006)

o there are places more efficient (i.e with low production costs) and that is linked with vertical specialization

o He used tobit ( mod function ) and probit ( deviation from the mean of standard distribution) at a country and industrylevel

WAKASUGI

o constructed an index of vertical intra-industry trade to measure thefragmentation (production away from the home country to another country) of production,

o used a gravity model and analyzed the impact of VIITin East Asia, NAFTA, and European Union

o concluded that fragmentationincreased with intra-industry trade.

LEITÃO AND FAUSTINO (2009)

examines the determinants of intra-industry trade in the automobile component sector in Portugal.

IIT occurs more frequently among countries that are similar endowments.

that trade increases if the transportation costs decrease.

MEASUREMENT OF IIT

o Grubel and Lloyd (1975) index

o IIT is the difference between the trade balance of industry i and the total trade of this same industry

o When will be trade totally intra industry and when totally inter inter industry

NAINA

EXPLANATORY VARIABLES

o (DGDP): his is difference in GDP between Pakistan and the partner country

o Loertscher and Wolter (1980) , Hummels and Levinshon (1995) and Greenaway et al. (1994) found a negative sign.

o MinGDP: this is the lowest value of GDP per capita o According to Helpman (1987) and Hummels and Levinshon (1995), a

positive sign isexpected,

o MaxGDP: this is the higher/highest value of GDP per capita o A negative sign is expected, as in Helpman (1987), Hummels and

Levinshon (1995)o the more similar countries are in economic dimension, the greater

the IIT between them

CONT :o DIM: is the average of GDP per capita between Pakistan and the

partner countryo Umemoto (2005) , Leitão and Faustino (2009) also found a

positive sign to Portuguese case.o DIST: this is the geographical distance between the Pakistan and the

partner countryo A longer distance will increase the transaction and transportation

costs. Thus, there is a negative relationship between the share of IIT in the industry and geographical distance.

o FDI: (Foreign Direct Investment inflows) o the relationship between IIT is somewhat ambiguous since FDI

may be a substitute for the trade.o Greenaway et al. (1994) estimated a positive sign for the

coefficient of this variable;o TIMB (Trade Imbalance): Following Lee and Lee (1993) our paper

considers the tradeimbalance as control variable, where TIMB is defined as: net trade as a share of trade

DOES H-O MODEL HOLD FOR INTRA INDUSTRY TRADE :

o Countries don’t produce and export the goods with abundance only

o  will benefit some industries, at the same time hurting other industries (For example, when UK exports technology abroad, technology companies will benefit; however, when clothing items are imported into UK, unskilled workers within clothing industry in UK will be hurt.)

CONCLUSION

• Economic Dimension(DIM): The market size benefit and influence the IIT.

• We expected –ve sign to geographical distance.

• In relation commercial policy we can refers that SAFTA could be an important mare to Pakistan but IIT is incipient.

• IIT occurs among countries with similar level of demand.