Intra-industry trade: A note on new evidence from Australia, 1968–1982

Abstract

T he simultaneous occurrence of export and import within the same industry, known as intra-industry trade (IIT), has received increasing attention in recent trade literature. Since the well-known Heckscher-Ohlin-Samuelson model does not provide a satisfactory explanation for this phenomenon, the observation of twoway trade flows of similar products has become a new challenge to the traditional trade theories. The growing body of theoretical and empirical literature concerning the concept of IIT has recognized that the study of the prevalence of such trade is important in two respects. First, the accurate quantification of pure IIT can provide a reliable indication of its relative significance in explaining international exchange by comparison with the relative factor proportions explanation. Secondly, the changing pattern of IIT has direct policy relevance in the sense that adjustment costs and restructuring problems will become minor if trade expansion takes the form of IIT rather than inter-industry trade [Caves, 1981; Greenaway, Milner, 1987]. The present study is motivated by the recent remarks of the Organisation for Economic Co-operation and Development (OECD) on the performance of the manufacturing sector in the Australian economy [OECD, 1987]. The OECD Survey Report on Australia points out that the manufacturing sector has stagnated and its contribution to total exports has been insufficient to give the sector a prominent position in foreign trade. One of the main reasons offered by the OECD for this perhaps undesirable outcome is the relatively little