Theories of Intra-industry Trade

Abstract

Abstract As observed and documented by Grubel and Lloyd in 1975, trade among similar countries—amongst advanced industrialized nations in particular, or the North-North trade—is much larger in magnitude and in proportion of world trade than trade among dissimilar countries, i.e., between rich and the poor countries or the North-South trade. Comparative advantages of nations that reflect cross-country differences in either technologies or factor endowments, and create the scope of arbitrage, thus do not seem to be a major driver of world trade since its scope is rather limited among similar or Northern countries. Moreover, a large proportion of world trade has been in similar products, i.e., intra-industry rather than inter-industry in character. These observations by Grubel and Lloyd have laid a foundation to the development of new trade theories beginning in the late 1970s with Paul Krugman’s explanation of intra-industry trade (IIT) under monopolistic competition, James Brander’s theorization of IIT under oligopolistic competition, which later came to be known as the strategic trade theory, and Elhanan Helpman’s characteristic approach. These pioneering works and their subsequent generalizations and extensions offered explanations of trade in similar products among similar countries in terms of economies of scale, imperfect competition, and product differentiation. Soon there were other theories explaining IIT in quality-differentiated goods. This chapter introduces to the students these pioneering models of IIT.