Marginal Intra-Industry Trade: Towards a Measure of Non-Disruptive Trade Expansion

Abstract

When Verdoorn (1960) found that the formation of a customs union among the Benelux countries had stimulated large, two-way trade flows of similar products, and Dreze (1961) discovered the same phenomenon in the fledgling six-nation EEC, economists took note for one main reason:adjustment costs. Instead of inter-sectoral specialization according to countries’ comparative advantage, the national economies seemed to preserve their broad industrial structures and to specialize predominantly at the intra-sectoral level. A ‘smooth adjustment hypothesis’ (SAH) soon became firmly rooted in economic thinking, according to which intra-industry trade (IIT) expansion generally entails lower adjustment costs than does inter-industry trade.