Intra-Industry Trade and Economic Integration

Abstract

In a world where trade is subject to significant tariffs, an industrial core is likely to develop in every country to satisfy home demand, whatever the initial allocation of factors. Conversely, in an integrated zone, and when transportation costs are not too high, production is concentrated to benefit from economies of scale, as Krugman argues from the example of the United States (Krugman 1991b). In consequence, trade liberalization may cause a sudden reallocation of production. This raises concerns that integration processes will prompt harsh adjustments, the cost of which will affect asymmetrically industries and countries engaged in the liberalization effort. In contradiction with these conclusions, European integration was accompanied by an increase in intra-industry trade (IIT) between member countries. The “mezzogiornification” of southern Europe did not take place, and it is doubtful that the “true US-style industrial specialization” Krugman forecasted will eventually take hold. The European integration process was followed by changes in trade patterns in Europe that generated interest from trade economists, who were led to think that the observed increase in similar product exchanges could be a result of this regional economic integration.