An empirical test of propositions on cross-country determinants of intra-industry trade in Canada
Date
1985
Authors
Tang, Yeng Yuen
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Abstract
A substantial proportion of international trade takes the form of a two way exchange of commodities belonging to the same industrial category. Such intra-industry trade falls outside the domain of the traditional theories of comparative advantage which are concerned with inter-industry trade based on countries specializing in different industries. Earlier informal explanations for intra-industry trade have recently been supplemented by the development of formal trade-theoretic models.
The objective of this thesis is to test those predictions of the new theory which relate the overall level of intra-industry trade between countries to the countries' characteristics. In this respect, the theoretical literature suggests that the level of intra-industry trade between countries will be greater (i) the more similar are the countries' comparative advantage, (ii) the more similar their per capita incomes, and (iii) the higher their per capita incomes. The tests are carried out using data on Canada's trade in seventy (three digit SIC) manufacturing industries with forty countries. The results provide strong support for the first two propositions but only weak support for the third.
Intra-industry trade has attracted interest not only because of its extent and its theoretical implications, but also because of its implications for the effects of trade liberalization. In particular, in conformity with the experience of countries entering the EEC and other trade liberalization arrangements, the results obtained here suggest that trade liberalization is more likely to lead to increased intra-industry trade, rather than inter-industry specialization, if the countries involved are at similar levels of development and have a similar comparative advantage.