Over the years, a great deal of research has focused on the expansion of intra-industry trade among the member countries of the European Union. Traditional international trade theories based on assumptions of constant returns to scale and perfect competition (e.g., the Hecksher-Ohlin model and the Ricardian model of comparative advantage) have been modified to explain this phenomenon (e.g., Helpman and Krugman, 1985). More recently, intra-industry trade has expanded between industrialized and newly industrializing countries, such as between Japan and Pacific Basin countries. In this context, international trade theories must again be modified to take into account the influence of industrialization.
Japan’s intra-industry trade is more extensive with Singapore, Korea, and Thailand than with Indonesia, Malaysia, and the Philippines because, like Japan, the countries in the first group are relatively rich in skilled labor and capital, whereas those in the second group are relatively rich in natural resources. However, although Japan has maintained large-scale, inter- industry trade with the latter group, it has also expanded intra-industry trade by increasing manufactured imports as these countries have progressed toward industrialization. Intra-industry trade among all six countries has expanded since Japan’s foreign direct investment in these countries increased owing to the sharp appreciation of the yen after 1985, As each country has become more specialized in certain manufactured products, Japan has formed production networks with them. This industrialization process is closely related to an increase in the variety of manufactured products (horizontal product differentiation) as well as an improvement in their quality (vertical product differentiation).
This paper provides a theoretical model to explain how industrialization affects the structure of international trade. Using conventional economic concepts such as economies of scale and monopolistic competition and considering both horizontal and vertical product differentiation, the model explicitly focuses on industrialization and its impact on the volume and share of intra- and interindustry trade. The paper considers two processes: one that increases the quality of manufactured products and one that shifts labor from the agricultural to the manufacturing sector. The model shows that the volume and share of intra-industry trade increase when the quality of products in a developing country improves and when the difference in relative factor endowments between an industrial and a developing country shrinks. It also suggests that the faster a developing country industrializes, the faster intra-industry trade increases.
This paper investigates empirically the structural changes in Japan’s international trade with Indonesia and Korea for 1975 and 1985. These countries were chosen because they differ in their relative factor endowments and technology.