RDP 9110: Resource Convergence and Intra-Industry Trade 1. Introduction

The development of theoretical models explaining two-way trade in similar commodities has resulted in economies of scale and desire for variety being elevated to a similar stature as factor endowments and intensities as determinants of trade patterns. While considerable effort has been focussed on testing the predictions of the factor endowments/intensities model, less attention has been focussed on the models emphasizing intra-industry trade. Yet, the ideas underlying the new generation of trade models, namely increasing returns to scale and the desire for variety in both production and consumption, are now coming to play increasingly important roles in a wide variety of research areas. This paper attempts to quantify the growing importance of trade based on these factors and extensively tests the models which make predictions concerning intra-industry trade.

The growth over the last 30 years in international trade amongst the OECD nations has coincided with the convergence of per capita incomes in those countries. While the convergence fact has been well researched,^[1] two important questions have received less attention. First, what role has resource convergence played in the income convergence of the OECD nations? Second, to the extent that the resource bases of the OECD nations have converged, why has trade amongst them grown so rapidly? The standard Heckscher-Ohlin-Samuelson (H-O-S) trade theory predicts that as nations' resource endowments become less disparate trade volumes should fall. The evidence that is presented in this paper suggests that resource convergence has indeed taken place and that this has led to an increase in intra-industry trade as well as convergence of per capita incomes.

The existence and growth of intra-industry trade also bears on a number of other important issues in macro and international economics. Many of the new generation of growth models are predicated on a production function in which the number of varieties of inputs plays an important role. The greater the number of varieties, holding the total level of input constant, the higher is output. Intra-industry trade in differentiated intermediate goods increases the number of varieties available to each producer. This has a level effect on output and, once imbedded into a dynamic model, may increase the steady state growth rate of the economy by increasing the marginal productivity of capital.^[2]

Intra-industry trade also impinges on the question of the pass-through of exchange rate changes into domestic prices. As countries become less specialized in the industrial structure of their international trade, and trade in differentiated products increases, questions concerning market structure become more important. As a consequence, the pass-through of exchange rate changes into domestic prices may become slower and more variable. This in turn has implications for both the speed of current account adjustment to exchange rate changes and the size and volatility of exchange rate movements.

Unlike most empirical studies of the predictions of trade theory this paper employs data in both the cross-section and time series domains. Few empirical studies exist on the relationship between changes in resource endowments over time and changes in trade patterns. The studies that have been undertaken focus on the H-O-S model, examining the impact of changes in resource distribution on comparative advantage. Stern and Maskus (1981) and Heller (1976) performed variants of tests of the H-O-S model for the United States and Japan respectively, finding mild support for the theory. In contrast, Bowen (1983) found support for the H-O-S theory in cross-sections for various years between 1963 and 1975 but no support in the time series domain.

A number of authors have conducted studies of intra-industry trade in manufactures for a particular country or cross sections of countries at a point in time.^[3] The theoretical models, however, make predictions concerning trade in all industries, not just manufacturing. Helpman (1987), in the most detailed study of intra-industry trade over time, uses all 4 digit SITC categories. He reports a negative correlation between the share of intra-industry trade for 13 nations and the dispersion in their per capita incomes. He does not, however, explicitly address the relationships between similarity of factor endowments and intra-industry trade. In this paper we use data on five resources together with 3 digit SITC trade data (238 “industries”) for 22 of the OECD nations for the period 1965 to 1987 to test these relationships.

Section 2 of the paper discusses the convergence of resource endowments amongst the OECD nations and the importance of resource convergence for income convergence. Section 3 surveys the principal models of intra-industry trade and details the importance and growth of this type of trade over the period 1965 to 1987. This is followed in Section 4 by testing of the intra-industry trade models. Finally, Section 5 summarizes the principal findings of the paper.

Footnotes

See for example Baumol and Wolff (1988), De Long (1988) and Dowrick and Nguyen (1989). [1]

Such a result can be derived by internationalizing the model presented in Romer (1987). A production function similar to that above also plays a central role in the international endogenous growth models developed by Grossman and Helpman (1988). For further work on the links between trade in intermediate goods and economic growth see Lowe (1991). [2]

See for example Aquino (1978), Caves (1981), Grubel and Lloyd (1975), Loertscher and Wolter (1980). [3]