This paper provides a theoretical model to address the issue of how industrialization affects the structure of international trade. Considering both horizontal and vertical product differentiation, the model shows that intra-industry trade increases when product quality improvement emerges in a developing country and when a difference in relative factor endowments between a developed and a developing countries shrinks. To promote understanding of the conclusions of the model, the paper also uses actual trade data between Japan and Indonesia and between Japan and Korea.
A key priority for the Gulf Cooperation Council (GCC) countries is to create a dynamic non-oil tradable sector to support sustainable growth. Since export diversification takes a long time, it has to start now. We argue that the failure to diversify away from oil stems mainly from market failures rather than government failures. To tackle market failures, the government needs to change the incentive structure for workers and firms. Experiences of oil exporters that managed to diversify suggest that a focus on competing in international markets and an emphasis on technological upgrade and climbing the “quality ladder” are crucial.