43.4 – Intra-industry Trade between Similar Economies
43.4 – Intra-industry Trade between Similar Economies
Learning Objectives
By the end of this section, you will be able to:
- Identify at least two advantages of intra-industry trading
- Explain the relationship between economies of scale and intra-industry trade
Absolute and comparative advantages explain a great deal about patterns of global trade. For example, they help to explain the patterns noted at the start of this chapter, like why you may be eating fresh fruit from Chile or Mexico, or why lower productivity regions like Africa and Latin America are able to sell a substantial proportion of their exports to higher productivity regions like the European Union and North America. Comparative advantage, however, at least at first glance, does not seem especially well-suited to explain other common patterns of international trade.
The Prevalence of Intra-industry Trade between Similar Economies
The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Roughly half of all world trade involves shipping goods between the fairly similar high-income economies of the United States, Canada, the European Union, Japan, Mexico, and China. Table 1 shows the percentage of U.S. exports and imports going to and coming from each region of the world.
| Country | U.S. Exports Go to … | U.S. Imports Come from … |
|---|---|---|
| North America | 33.2% | 28.9% |
| Europe | 24.2% | 23.3% |
| Pacific Rim Countries | 23.2% | 29.9% |
| South & Central America | 9.7% | 4.6% |
| Africa | 1.4% | 1.2% |
| Other Countries | 6.8% | 11.1% |
| (Source: https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf Exhibit 14) |
Moreover, the theory of comparative advantage suggests that each economy should specialize to a degree in certain products, and then exchange those products. A high proportion of trade, however, is intra-industry trade—that is, trade of goods within the same industry from one country to another. For example, the United States produces and exports autos and imports autos. Table 2 shows some of the largest categories of U.S. exports and imports. In all of these categories, the United States is both a substantial exporter and a substantial importer of goods from the same industry. In 2022, according to the Bureau of Economic Analysis, the United States exported $150 billion worth of autos, and imported $379 billion worth of autos. About 60% of U.S. trade and 60% of European trade is intra-industry trade.
| Some U.S. Exports | Quantity of Exports | Quantity of Imports |
|---|---|---|
| Autos | $150 | $379 |
| Food and beverages | $123 | $184 |
| Capital goods | $537 | $828 |
| Consumer goods | $231 | $817 |
| Industrial supplies | $563 | $489 |
| Other goods | $60 | $107 |
| (Source: https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf Exhibit 10) |
Why do similar high-income economies engage in intra-industry trade? Wh