The Measurement of lntra-lndustry Trade When

Overall Trade Is Imbalanced

By

Antonio Aquino

I t is now evident tha t intra-industry trade is not less difficult to measure than it is to explain it. Some of the difficulties of measurement arise in connection with the existence of substantial and varying (both

across countries and over time) overall imbalances in the sets of trade- flows more frequently investigated.

Grubel and Lloyd [I975, p. 22] perceived the upward bias impressed to the unadjusted country-summary measures by the existence of an overall imbalance in the set of trade flows under investigation and pro- posed to eliminate this bias by normalizing the country-summary measures for the ratio of the overall imbalance to total trade. In Aquino [I978, pp. 279ff. ] it was argued that this method is unsatisfactory because it fails to detect (and correct for) the bias where it first arises: at the single commodity level. The consequence of this failure is not only that the bias is ignored when measuring intra-industry trade at the single commodity level (where though the sign of the bias is uncertain its existence is not) ; even the country-summary measures can be altogether unreliable. This because .Z I Xi j - - Mij l , for any set of commodities for which Xlj ~< Mij or

Xij 1> Mij for all i is constantly equal to i iZ Xij - - i~ Mijl whatever the

values of Xij and Mij. This means that when the set of trade flows under investigation is characterized by a substantial overall imbalance, if the bias is not corrected at the single-commodity level, the country-summary in- dexes give an identical measure of the relevance of intra-industry trade for situations which, even at a glance, appear to be substantially different 1.

I t was then proposed a method of adjustment for overall imbalances which appears to be capable of overcoming these difficulties and it was also stressed the strong empirical relevance of the correct choice of the method of measurement by showing how, with reference to actual trade flows in manufactures (in I972), the difference between the values of the different indexes so far proposed could be as high as 94 per cent. The method of adjustment proposed in Aquino [I978 ] was subsequently era-

For an example see Aqui~o [I978, p. 28x].

764 Bemerkungen

ptoyed, among others, by Balassa [1979] and b y Loertscher and Wolter [I98O].

Greenaway and Milner [1981 ] (from now on G-M) bring a wholesale attack on the adjustment for overall imbalances on the ground that "it does beg at least two fundamental questions. What set of international trading transactions would be balanced in a situation of .. equilibri- um . . . ? And how would full equilibrium influence the total level of a particular set of transactions . . . and trade in particular industries ?" (P. 757). In view of these difficulties G-M propose to by-pass the problem by a "pragmatic piecemeal approach" based essentially on concentrating the analysis on "normal" periods in which trade flows are in substantial equilibrium.

It is quite clear tha t G-M's obiections to adiustment for multilateral imbalances (on which I would like to concentrate in this note) stem from the belief that its purpose would be to correct for the effects of "non-equilibri- um," and consequently transitory, imbalances in overall trade. My con- tention is that this is absolutely not true. A very simple example, I hope, can clarify the issue.

In the early eighties the equilibrium relation between exports and im- ports of manufactures seems to be about I to I for the United Kingdom, while it is about 4 to I for Japan. The reason is well-known: while the U.K. is almost selfsufficient for raw materials and has a structural surplus for services, Japan presents a strong structural deficit both for raw materials and for services which can only be compensated by a strong structural surplus for manufactures. In this situation it is an easy guess tha t any unadjusted measure of intra-industry trade in manufactures would give a much lower value for Japan than for the U.K. If one does bother to calculate an index of intra-industry trade in manufactures for these two countries based upon trade flows in the single manufactured commodities, it seems quite reasonable to think that what he looks for is an index which would reflect something different from the strong disparity in the overall balance. Are perhaps G-M suggesting that before we make a meaningful comparison of intra-industry trade inside manufactures between the U.K. and Japan we wait until nuclear power will replace entirely crude oil so that Japan will have a more balanced trade in manufactures ?

A similar problem arises in time-series analysis. After 1973174, and again after i979]8o, the equilibrium ratio of exports to imports of manufac- tures has increased substantially for several industrial countries in pro- portion to their degree of dependence on imported crude oil. How do we separate the effects of the increases in oil prices from those of the funda- mental determinants of intra-industry trade inside manufactures ?

A n t o n i o A q u i u o 765 The Measurement of Intra-Industry Trade

Even abstract ing from differences, both across countries and over time, in overall imbalances, how do we deal with the possible strange results arising from the fact tha t X I Xij - - Mij[, for any set of commodities for

which Xij ~< Mij o r Xij >~ Mij is constant whatever the values of Xij and Mij ? 1

Summarizing, the correction at the single-commodity level of the bias connected with overall imbalances is necessary to make meaningful com- parisons: (I) between countries with a different overall imbalance; (2) between the positions of the same country in different periods when the overall imbalance is changing; (3) between countries characterized by an even identical but substantial overall imbalance; (4) between the positions of the same country in different periods when the overall imbalance is substantial, even if unchanged.

The identification of the overall imbalance to be employed does not require any choice of a meaningful notion of equilibrium. If one is inter- ested in investigating intra-industry trade inside manufactures, he must correct for the bias arising from overall imbalances in trade in manufac- tures; if one is interested in investigating intra-industry trade inside chemicals, he must correct for the overall imbalances in trade in chemical products, and so on. I t is obvious tha t a meaningful identification of the set of commodities in which to analyze intra-industry trade must refer to some criterion of homogeneity with respect to the most powerful deter- minants of the structure of trade flows inside each set of commodities. I t is on the basis of such a criterion tha t usually the phenomenon is investi- gated with reference to trade in manufactures.

The objections to the "equiproportionality-rule" in implementing the adjustment seem to be justified. I t is clear tha t this rule is only acceptable " b y default," in the absence of reliable elements for the identification of an alternative criterion. I would hope tha t on the identification of such a bet ter criterion of implementation, and not in a sterile controversy about the need for the adjustment, could in the future be concentrated the efforts of the people interested in understanding the nature of trade flows in the world which we live in.

References

Aquino, Antonio, " I n t r a - l n d u s t r y Trade and I n t e r - I n d u s t r y Specialization as Con- cur ren t Sources of In t e rna t iona l Trade in Manufac tures" . Weltwirtschaflliches Ar- chly, Vol. 114, 1978, pp. 275--296.

Balassa, Bela, "Intra-Industry Trade and the Integration of Developing Countries in the World Economy". In: Herbert Giersch (Ed.), On the Economics o/ Intra- Industry Trade. Symposium 1978, TiXbingen, 1979, pp. 245--270.

1 Again see example reported in Aquiuo [I978, p. 281].

Weltwi~tschaftliches Axchiv Bd. CXVII. 5z

766 Allto1~io Aquiao The Measurement of Irttra-Industry Trade

Greenaway, David, and Chris R. Milner, "Trade Imbalance Effects in the Measure- merit of Intra-Industrv Trade. lt,'eltr~,irtschaftliches Arehiv, \rol. i i7, I9~1, pp. 756 to 762.

Grubel, Herbert G., and P. J. Lloyd, lntra-Ii~dustry Trade: The Theory and Measure- merit oJ Inter*zational Trade in Differentiated Products. London, 1975.

Loertseher, Rudolf, and Frank Wolter, Determinants of Intra-Industry Trade: Among Countries and across Industries". H'eltwirtschaftliches Archiv, Vol. II6, 198o, pp. 280--293.