Testing intra industry trade in the group of three, comparative analysis between trade patterns...

University of Fribourg

Testing intra-industry trade in the Group of Three, comparative analysis between trade patterns inside a

trade agreement

Written by: Fabio Moscoso D.

No. 352.

This working paper was realised as part of the candidates doctorate seminar in International Economy and Regional Economy under the direction of PhD. Professor Gaston Gaudard,

CRESUF.

October 2002

TABLE OF CONTENTS

SUMMARY 3

INTRODUCTION 5

1 THEORY AND SIGNIFICANCE OF INTRA-INDUSTRY TRADE 6

1.1 Standard intra-industry trade theory 6

1.2 How to choose IIT indexes: inherent problems 7

2 TRADE STRUCTURE IN THE GROUP OF THREE 12

2.1 Structure trade similarity degree in the G-3 15

2.2 Methodology to measure intra-industry trade 18

3 INTRA-INDUSTRY TRADE IN THE G-3 19

3.1 Evolution of the G&L indicator in the G-3 22

3.2 Intra-group IIT trade flows 24

CONCLUSION 28 INDEXES 30 BIBLIOGRAPHY 36

Testing Intra-industry trade in the Group of Three 2

SUMMARY

International trade is phenomenon that consists of each country exporting goods and services

in order to improve growth, through comparative advantage, technology, and compe-

titiveness. Intra-industry trade (IIT) is phenomenon which appeared in the 60�s in some

developing countries. Theoretically, intra-industry trade, it is observed, first, with the discovery

of high and growing IIT levels in the 1970s, produced a wave of new thinking by trade theorists

that shifted the emphasis of the models away from country-specific trade determinants, generically

termed comparative advantage, towards industry-specific factors such as increasing returns and

external economies.

Models of the �new trade theory�, and the derived �new economic geography�, generally predicted

that a lowering of trade barriers would promote the concentration and relocation of industries near

their largest markets. Second, most economists agreed on the hypothesis that high levels of the

IIT were indicative of relatively low trade-induced adjustment costs between countries with similar

developments levels based on the concept of comparative advantage (Bruhat and Hine,

1999). Thus, intra-industry trade represents international trade within industries rather than

between industries. Today, a synthesis of determinants of the intra-industry trade and inter-

industry trade is defined as:

Inter-industry is when countries export and import products from different Industries.

However, trade products between developed countries are actually similar. So, intra-

industry trade occurs when a country exports and imports goods in the same industry.

Although IIT was a trend in industrialised countries, the proximity and the new regional

liberalisation process allowed Latin American countries to test a similar trend in the last

few decades.

Intra-industry trade is a new phenomenon in Latin America. Most Latin-American countries

were raw material exporters in the 60�s and 70�s with low levels of industrial exports. In the

80�s intra-industry trade was not representative in Latin America. Nevertheless, in the 90�s,

the proportion of IIT in regional trade increased due to the liberalisation process, but not with

the same characteristics of the developed countries.

This growth in regional intra-industry trade is determined by some different factors, such as

trade agreements, regional integration process and the reductions of non-tariff barriers

engaged in the Latin-American countries. According to ALADI, in the 80�s, intra-industry trade

represented only 6% of exports and 10% of global imports in the region.


Furthermore, Mexico was the only country with an important IIT level (18.3% of the total

volume of Mexican trade), while South America presented IIT levels of around 3.6% of global

commerce. At the beginning of 90�s, intra-industry trade in Latin America increased to 11% of

global commerce, but Mexico was again the only country with a significant IIT level, due to a

relationship with United States within NAFTA. This trade agreement allowed Mexico to

improve its IIT level and facilitated the commercial policy in the region, which consisted of

expanding a potential market towards South America.


INTRODUCTION

In the late 1980�s, following the attenuated shock of the Mexican debt crisis, the growth

sustained by import substitution strategy was not the optimal route to long-term economic

growth, and the example of some countries in the region led to a strong movement in favour

of trade liberalisation.

Furthermore, the disappointment with regional integration experiences in the 70�s and 80�s in

Latin America led to the recent trade blocks creation and the opening of Latin American

countries promoted the negotiation of new regional trade agreements. Regional integration

should help break domestic market segmentation, introduce and master new technologies,

develop new products and contribute to the industrialisation process.

In this context, Colombia, Mexico and Venezuela signed a trade agreement called the Group

of Three (G-3). The economic cooperation between Colombia and Venezuela as well as the

important commercial flows between them helped with the creation of G-3.

On the whole, the G-3 is free trade zone with progressive tariff reductions for 10 years, which

started on 1st January 1995. With similar structural characteristics within the North American

Trade Agreement (NAFTA). For economists in the region, the G-3 could constitute a new

opportunity to expand the industrial trade levels between the three countries.

This article intends to analyse the bilateral intra-industry flows as well as global IIT in the G-3.

For this goal, the paper is organised as follows:

Section 1 presents an overview of intra-industry theory.

Section 2 gives an explanation about the trade structure in the three countries. It will

explain trade similarity degree in each country, with particular attention to the IIT index

choice for the G-3.

Section 3 indicates the methodology used for testing IIT, the main results of the Grubel

and Lloyd index and a differentiation of products between one-way trade and two-way

intra-industry trade.


1 THE THEORY AND SIGNIFICANCE OF INTRA-INDUSTRY TRADE

Originally, the empirical evidence of simultaneous exports and imports of similar

products was understood to be an invalidation of traditional theories of international

trade based upon the principle of comparative advantages1. David Ricardo (1817)

introduced the standard theory of comparative advantage: goods and are more mobile

across international boundaries than resources (land, labour, capital). This theory

about advantage comparative deals with the causes of international trade that are

generated by differences among countries. Furthermore, the Heckscher-Ohlin model

presents a theory whereby every country faces technological frontiers and has

products with the same qualities and the only difference between countries is in terms

of the factors of production2. But today, the problem in not found in the advantage

comparatives and preferences based theories of international trade. The discussion

addresses the measurement of the phenomenon and the integration of theoretical

advances related to the differentiation of products3.

1.1 Standard intra-industry trade theory

Intra-industry trade aptly describes international trade differentiated products because

commonly used statistical trade classification schemes result in much of this trade

showing up as the simultaneous export and import of products belonging to the same

industry, thus representing the exchange of goods and services within, rather than

between, industries4. Therefore, the significance of intra-industry trade arises from its

basic character: it need not be based on comparative advantage. To a large extent intra-

industry trade arises from the fact that products are differentiated and the production of

any particular product requires some fixed costs5. In addition, one of the specific

1 See: Fontagné and Freudenberg, �Intra-industry Trade Methodological Reconsidered�, 1997. 2 See: Tefler, � The Case of Missing Trade and Other Mysteries�, 1995. 3 See: Fontagné and Freudenberg, �Intra-industry Trade Methodological Reconsidered�, 1997. 4 See: Grubel and Lloyd, «Intra-industry Trade», 1975. 5 See: Ruffin, Roy, �The Nature and Significance of Intra-industry Trade�, 1999.


industrial trade between competing countries appears as the result of the intra-industrial

degree specialization compared to the relative size of the market and with the nature of the

tariff structures adopted in the past.

One of benefits of IIT is that international trade need not cause the dislocations associated

with inter-industry trade. Samuelson Theorem suggests that international trade can cause a

redistribution of income from scarce factors to abundant factors. But if most international trade

is intra-industry, the impact on internal income distribution should be relatively minor. If trade

is not based on scarce and abundant factors of production, it does not result in reduced

demand for the scarce factors and increased demand for the abundant factors; thus trade

expansion need not result in large changes in the distribution of income6. In this sense, trade

not appear to have a negative consequences for income distribution in the Group of Three.

Therefore, in theory, intra-industry trade could enhance the gains of the trade due to better

exploitation of economies of scale rather than a comparative advantage of the production.

Besides, intra-industry trade reduces the demands for protection because in any industry

there are both exports and imports, making it difficult to achieve unanimity among those

demanding protection7. In conclusion, intra-industry trade could improve specialization levels

within industrial categories, it may also stimulate innovation producing a greater number of

goods and increase technological levels.

1.1 How to choose IIT indexes: inherent problems

Intra-industry trade was born by accident, after analyzing the changes in the trade patron

intra-block in Benelux. In fact, it was the calculation of the trade bilateral relationship between

121 products with a comparable international classification level at two different times. There

are different studies about IIT, in particular by, Verdoorn (1960), Kojima (1964), Balassa

(1966) Grubel and Lloyd (1973), Aquino (1978) and Glesler (1979). Since the first studies

carried out by various authors, the intra-industry trade relation and free trade agreements

have been strongly dependent on each other. This relationship between trade agreements

and intra-industry trade was largely explained by several studies in the region.

This link to the American continent was analyzed by Balassa in 1979, measuring the IIT in the

CARICOM agreement and in the free trade agreement between Canada and the United Sta-

tes.

6 See: Ruffin, Roy �The Nature and Significance of Intra-industry Trade�, 1999, page 7. 7 See: Marvel and Ray �Intra-industry trade: Source and Effects on Protection�, 1987.


Others researches analysed the intra-industrial specialisation degree in the European

Community (Glejser, 1982), research formally based on the utilisation of the IIT index

measurement, which showed the statistical growth of specialisation levels in the EC8.

The measurement of intra-industry trade within a specific category of trade could to cause,

several difficulties arise from with respect to the analyse of IIT.

Firstly, the statistical category may only consist of products that are homogeneous. When the

category considered consist of products that are homogenous in this sense of intra-industry

trade and when exports equal imports, IIT is 100%. Secondly, the statistical category may not

consist precisely of goods homogeneous in the sense of intra-industry trade9.

According to Kol and Mennes, trade flows can be defined by:

a) The differences in the comparative advantage, in this sense, Heckscher Ohlin

mention the description of some considerations such as neo-factors and neo-

technology.

b) Trade flows that cannot be explained by comparative advantage concepts

mentioned previously.

c) Trade flows corresponding to intra-industry trade. It is obvious that trade between

differentiated products can be considered like a trade flow in the categories (a) and

(b). But when the IIT represents simultaneous exports and imports of products, it is

probable that these trade flows could be considered in category (b).

Thus, in accordance with Kol and Mennes, intra-industry trade (trade flows of type c) may

consist of trade flows under A or B. On the other hand trade flows of type A and B will both

include trade that in not intra-industry trade.

To apply the intra-industry analysis, we can define what �trade overlap� is, what two way

trade is, lastly what a similar product is. At the statistical level we may distinguish:

Trade overlap: This is defined as the amount of trade within a statistical category equal

to twice the minimum of exports and imports. In others words, trade overlap represents

the amount of trade, where imports and exports match.

Two way trade: As mentioned before, trade overlap may overestimate the amount of

intra-industry trade within a statistical category, because for instance exports consist

8 See: Glejser, «Intra-Industry and Inter-Industry Trade Specialisation: Trend and Cycle in the E. E. C. (1973-1979), in Intra Industry Trade, 1983, pages 35-46. 9 See: Kol and Mennes, � Two Way Trade and Intra-Industry Trade with an Application to the Nether-lands�, 1983, page 48


(partly) of products not to be considered as diversification of (part of) the imported

goods. On the other hand, trade overlap may not consist of all trade to regarded as

intra-industry trade10.

Product similarity: even inside an item of the �combined nomenclature�, products may

differ clearly by their quality. In this case, we can assume that differences between

products principally in prices could reflect quality differences. Therefore, products whose

unit values are close (in a year) , are considered to be similar.

In the statistical analyse intra-industry trade can be measured by :

a) Trade overlap proportion which may over or under-estimate the amount of intra-industry

trade.

b) Two way trade

In this context, Kol and Mennes explained that both measures could contain spurious intra-

industry trade. This spurious IIT is normally called categorical aggregation.

In spite of the statistical difficulties to measure intra-industry trade, several indexes are

proposed in the trade literature. According to Grubel and Lloyd, on the whole, intra-industry

trade indexes, are divided in the three important groups as follows:

A) Geographic distribution of trade. One of the main analytical tools was the

separation of a country�s total merchandise trade into flows which were balanced

by bilateral imports and exports and by multilateral surpluses and deficits. The

author of many of these studies was Hilgert.

B) Historic development of the commodity distribution of trade. This group was

concerned with trade of foodstuffs and raw materials for manufactures. The most

important studies of this problem were by Hilgert, Hirschman, Baldwin, Maizels

and Kojima.

C) International trade problems. This was stimulated by economic integration,

liberalisation of trade, analysing the effects of mutual tariffs reductions on the

patterns of specialisation. These problems were analysed by Aquino, Verdoom,

Balassa, Adler and Grubel and Lloyd.

10 See: Kol J. and Mennes L. � Two Way Trade & Intra-Industry Trade�, 1983, page 51.


Nevertheless, intra-industry trade indexes present some similarities. In this sense, it�s

obvious that choice IIT indexes for the analysis of G-3, is limited only to indexes from

the third group.

The most usual intra-industry trade indexes normally used for kind of analyse are:

As far as Verdoon�s model is concerned, for intra-industry specialisation:

X1 U1 =--------- where X1 and M1 are exports and imports for sector i M1 While this method of quantifying the relationship between imports and exports of one

industry overcame one undesirable feature of the Verdoom measure it had a major

shortcoming11.

Michaely defined his index of dissimilarity as follows:

5 D=Σ / Xi/X � Mi/M/ i=1 Where X and M were, respectively, a given country�s total exports and imports in value

terms and Xi and Mi the exports and imports of category I as defined above. The

Michaely indicator, however, is normally used to compare trade composition i.e

similarity of imports and exports structure. By construction this index evaluates trade

imbalances by reasoning in relative terms, i.e. comparing the share of elementary

exports in total exports and the share of elementary in total imports. Finally, it is no

longer related to the pattern of trade12.

Concerning Aquino�s measure, he did a correction from Grubel and Lloyd unadjusted

index, based on theoretical exports and imports at elementary level:

Σ ( Xjk + Mjk)- Σ (Xejk � Mejk)

j

Aquinok =------------------------------------------------

Σjk ( Xjk + Mjk) j

But, Aquino�s measure is considered for him self identical to the Michaely indicator13.

11 See: Grubel and Lloyds mentioned by Kol J. and Mennes, «Two-Way Trade & Intra-Industry Trade», in Intra-industry Trade Empirical & Methodological Aspects, 1983, page 51. 12 See: Vona, 1990 mentioned by Fontagné , 1998. 13 See: Fontagné and Freudenberg page 26.


/X1 � M1/

D1=------------------- (X1 + M1) Where D1 measures total trade proportion (X1 +M1) which, in fact, is not intra-industry trade.

This is an undesirable property of the Balasa model that all industries are considered with

equal importance, regardless of the size of their total industry exports and imports14. It for

these reasons that most economist prefer to used Grubel and Lloyd index.

Then Grubel and Lloyd proposed a measure of intra-industry trade. The measures vary

between 0 and 100. When the measures of intra-industry trade are calculated for all individual

industries at all levels of aggregation the analysis of these measure proceeds in two

directions. First, at a given level of aggregation they examined the distribution of these

measure among some or all-individual industries; and second, for a particular set of trade

goods Grubel and Lloyd examined the measures of intra-industry trade computed at different

levels of aggregation:

n [(X1 + Mi - /Xi � Mi/ ] Bi = Σ -------------------------------------- . 100 i n

Σ (X1 + Mi) i

So Bi measures average intra industry trade directly as a percentage of the export plus import

trade. It is also equal to the sum of intra-industry trade for the industries as a percentage of

the total export plus import trade of the n industries15. But trade can never be completely of an

intra-industry nature, since exports cannot match imports in every industry. Economists

arguing in favour of a correction of total trade imbalance divide international trade in three

categories16:

a) Intra-industry trade (balanced by definition).

b) Inter-industry trade which becomes balanced at the aggregate level as soon

as we separate it from the

c) Trade imbalance

14 See: Grubel and Lloyd «Measures of Intra-Industry Trade», in Intra-Industry Trade, 1973, pages 27 and 28. 15 See: Grubel and Lloyd �Measures of Intra-industry Trade�, 1975, page 22. 16 See: Fontagné and Freudenberg �Trade Patterns Inside the Single Market� page 23.


Concerning this theory, Grubel and Lloyd proposed a measure for trade imbalance

adjusting for the aggregate trade imbalance by expressing intra-industry trade as a

proportion of total product export plus import less trade imbalance as follows:

n n

Σ (X1 + Mi) - Σ /Xi � Mi/ i i Ci = ---------------------------------------------------------- . 100 n n n Σ (X1 + Mi) - Σ Xi � Σ Mi/ i i i

According to Fongtagné, in this case, considering the trade imbalance as a part of

inter-industry trade flow reduces the division to only two categories: inter and intra-

industry trade. However, Grubel and Lloyd unadjusted index may be inappropriate for

empirical purposes. That it gives a double explanation a to the majority flow. A second

problem arise when (here Balassa) indicator is used both to measure the extend of IIT

and of �revealed comparative advantages17. In this context, Grubel and Lloyd adjusted

index is the most normally indicator to measure intra-industry trade for a bloc of

commerce.

2 TRADE INDUSTRY STRUCTURE IN THE G-3

In the 80�s, the value of ALADI�s industrial exports represented only 8% of total trade.

Between 1985 and 1990, industrial trade increased to 10% of ALADI�S global trade

with an important influence from Mexican commerce. In this period Mexican intra

industry trade corresponded to 66% of total of regional IIT. Only, some countries

presented a low IIT level, in particular Brazil (9.9%), Argentina (7.3%) and Uruguay

(6.1%)18. The greatest surge in exports during this period, for the region as a whole,

was in basic inputs (14% annually), whose growth rate was twice as high as average

increased in both labour and capital-intensive traditional and new industries but semi-

manufacturers expanded more slowly (4% per year).

17 See: Fontagné and Freudenberg page 26. 18 See: «El Comercio Intraindustrial en el Intercambio Regional», ALADI, 2000.


Table I

Group of Three’s intra industry trade 1994-2000 (US$ millions)

Source: author�s calculations, based on information from the ALADI database.

The fairly strong expansion of G-3 industrial exports had two notable features:

i) it occurred within a context of trade liberalisation between Colombia, Mexico and

Venezuela in 1995.

ii) the increase in the share of manufacturers in total exports (see: table I).

Table II

Intra-industry trade evolution in the Group of Three 1994-2000 (in percentages)

Source: Author�s calculations, on the basis of information from the ALADI database and INTAL database. In 1996, decreased industry trade represents only 28.97% of the intra group industrial

commerce. In 1997, industrial trade increased to US$ 1264.9 million, which is 30% of global

1994 1995 1996 1997 1998 1999 2000Exportations 882.4 639.4 1301.8 1616.4 1722.5 1492.4 1992.8

Importations 1789.5 2100.7 2055.6 2600.0 2239.5 1639.2 1936.6

Global commerce 2671.1 2740.2 3357.4 4216.4 3962.1 3131.7 3929.4

Intra-industry trade 742.8 1063.3 972.5 1264.9 1139.4 1004.3 1138.4

SITC sections rev.5 1994 1995 1996 1997 1998 1999 2000

0 Food and live animals 5.99 6.63 7.15 5.56 8.37 7.93 6.811 Beverages and tobacco 0.61 0.95 1.55 1.30 0.95 1.72 1.102 Crude matter. Exp food/fuel 2.88 3.63 2.91 2.10 1.35 2.64 2.713 Mineral fuel/lubricants 9.33 4.81 4.61 10.71 4.21 6.77 5.534 Animal/veg oil/fat/wax 0.32 0.48 0.35 0.43 1.27 1.37 2.065 Chemical/products N.E.S 20.57 21.41 18.62 16.79 18.52 20.27 20.726 Manufactured goods 26.11 27.20 28.96 24.73 20.22 18.95 20.237 Machinery, transport, equip 22.55 24.38 26.69 29.55 30.73 25.41 26.498 Miscellaneus manuf. Arts. 10.57 9.16 7.99 7.66 12.25 12.70 13.329 Commodities N.E.S 1.02 1.30 1.11 1.13 2.09 2.200 1.01Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0


intra-group trade. During the period 1998-2000, industry trade expanded more

homogeneously with a share of 29.90% of G-3�s commerce. Although industry trade

participation did not change radically in the period 1995-2000, in 1995, industry commerce

increased to 43.10% in comparison to 1994.

Figure I

Source: Author�s calculations, based on information from table II.

This increase in intra-industry trade is considerably influenced by Mexico�s exports, with the

Maquilas information incorporated in 1993. Maquilas trade had an important participation in

the regional IIT because this kind of commerce has a significant intra-industrial component.

Thus, this commerce can explain the important growth in G-3 trade since 1994.

Nevertheless, we considerate as a factor, the openness in the Mexican market for the

Colombian and Venezuelan products, though structures trade in both countries were defined

in the 70�s and 80�s as agriculture and oil exporters respectively.

G-3: Industry trade evolution by section

0

5

10

15

20

25

30

35

1994 1995 1996 1997 1998 1999 2000

0 Food and liveanimals

1 Beverages andtobacco

2 Crude matter.Expfood/fuel

3 Mineralfuel/lubricants

4 Animal/veg/oil/fat/wax

5 Chemical productsN.E.S

6 Manufacturedgoods

7 Machinery,Trasnsport andEquip.8 Miscellaneus.manuf. arts.

9 Commodities N.E.S.


According to the Standard International Trade Classification (SITC), industry trade

flows in the G-3 were concentrated in the sections of manufactured goods (6) and

machinery, transport and equipment (7) and chemical products (5) (see: Table II).

At the beginning of 1994, intra industry in the G-3 was concentrated in these three

sections with a share of 69.24%. In some regional studies, in the 90�s, industry

regional trade showed an important growth, in particular, the IIT participation in global

commerce. In the G-3, intra-industry trade reached US$ 1063 million in 1995 and US$

1138 million in 2000. This evolution of the IIT between the three countries did not

really change during the period 1994-2000, but the IIT concentration was significant in

relation to global commerce in the G-3, 38.80% in 1994.

Between 1997 and 2000 IIT global participation fell to 32.06% in 1998 and 28.97% in

2000 respectively. Figure I shows irregular evolution in the different SITC sectors

principally in 4, 5 and 6. Paradoxically, between 1995 and 1997, most industry sectors

of the SITC classifications decreased in spite of the liberalisation of markets in the

three countries. This industry trade behaviour can be associated with a low

economical growth in Colombia and Venezuela, but particularly with the economic

degradation in Colombia this year.

2.1 Structure trade similarity degree in the G-3

Before analysing intra-industry trade in the G-3, we begin by describing trade

structural differences between Colombia, Mexico and Venezuela. A first

approximation consists of a calculation of the bilateral trade similarity degree (SD) for

exports and imports between the three countries. The SD is:

n Xpi Xn

i

IS (p,n)= { [Σ minimum ----------, ----------- ] } i=1 n n

Σ Σ i=1 i=1

where,

X= exportations; i= analysed sector;

and p and n are compare countries.


For this study the similarity degree was obtained from 18 industrial sectors

considering bilateral exportation and importation19 .

Thus the calculation of the similarity degree in the G-3 index becomes:

n n n n

IS (global) Σ{ [ Σ ISpb, Σ ISn

b , Σ ISyn ] }

i=1 i=1 i=1 i=1

where,

ISb= is the similarity degree for exports and imports;

p, b and n= are the countries compared;

IS= is the global similarity degree intra-group.

The analysis of similarity degree in the G-3 shows that export structures between

1994 and 2000 were highly similar in the three countries particularly bilateral exports

between Venezuela and Colombia. In 1994, the SD between them was 84.27%,

83.32% in 1995 and 74.01% in 1999. This similarity is obviously due to commercial

integration within the Andean Pact while import structure is relatively less similar. In

1994, the SD between Colombia and Venezuela was 78.22% and 74.01% in 1999.

The SD between Colombia and Mexico was lower. In 1994, the structural export

similarity was only 40.99%, this weak index can be explained because in the 80�s

most bilateral export were concentrated on primary products in particular coffee.

Concerning the imports, the Colombia and Mexican structures are relatively different.

19 For the similarity degree index all groups were defined according to the WTO division, thirds version of the Standard International Trade Classification (SITC) revision 2, 5 digits. The groups carried in this study are: A. Primary products sections, 0,1,4 and division 22. Raw materials, divisions 21,23,24,25,26 and 29. Mining products, divisions 27, 28. Fuels section 3. Non-ferrous metals division 68. B Manufactures, sections 5, 6, 7 minus division 68 and group 891. Iron and steel division 67, chemicals division 51, plastics division 57,58; inorganic chemical division 52, pharmaceuticals division 54; other chemicals divisions 53,55,56,59. Other semi-manufactures division 61, 62, 63, 64, 66, 69. Machinery and transport equipment division /. Power generating machinery division 71 minus group 713. Other non-electrical machinery divisions 72, 73, 74. Office machines telecommunications equipment divisions 75, 76 and group 776. Electrical machinery and apparatus division 77 minus group 776 and subgroup 7783. Automotive products groups 781, 782, 783, 784 and subgroups 7132, 7783. Other transport equipment division 79, groups 785, 786 and subgroups 7131, 7133, 7139. Textiles division 65. Clothing division 84. Other consumer goods divisions 81, 82, 83, 85, 86, 87, 88, 89 excluding group 891, division 82, 83, 85, and group 894. Other products section 9 and group 891.


Figures II and III

Source: Author�s calculations, based on information from the ALADI database and WTO methodology.

The best bilateral relationship between Mexico and Venezuela showed a high

similarity degree due to exports of manufactured goods. In 1994, the bilateral

export similarity degree was 68.09%, growing progressively to 74.33% in 1997.

Table II

Group of Three: export and import similarity degree index

Source: Author�s calculations, based on information from the ALADI database and WTO methodology. Lastly, the G-3 similarity degree showed stable levels during the first seven years

with a degree of 52.26% in 1994, 60.50% in 1997 and 60.54% in 2000. This means

1994 1995 1996 1997 1998 1999 2000Colombia-Mexico 40,99 44,11 47,60 50,13 52,66 54,39 53,08Colombia-Venezuela 84,97 83,32 83,71 81,29 78,22 74,01 78,47Mexico-Venezuela 68,09 74,96 81,17 78,32 74,33 72,05 74,95Total exportations 64,68 67,46 70,83 69,91 68,40 66,82 68,84

Colombia-Mexico 42,86 48,96 54,44 55,39 56,75 57,15 61,08Colombia-Venezuela 78,22 79,14 76,25 76,39 73,31 70,42 68,06Mexico-Venezuela 35,69 39,28 42,61 49,72 49,75 48,39 52,47Total importations 52,26 55,79 57,77 60,50 59,93 58,65 60,54

Group of Three: similarity degree index (exportations 1994-2000)

0

10

20

30

40

50

60

70

80

90

1994 1995 1996 1997 1998 1999 2000

Colombia-Mexico Colombia-VenezuelaMexico-Venezuela Total exportations

Group of Three: similarity degree index (importations 1994-2000)

0

10

20

30

40

50

60

70

80

90

1994 1995 1996 1997 1998 1999 2000

Colombia-Mexico Colombia-Venezuela

Mexico-Venezuela Total importations


that, in the G-3, , there was no real trade diversification between the three countries and on

the whole, they continue to trade same products but in a higher quantity since 1994.

2.2 Methodology to measure intra-industry trade

The basic idea in this article is to determinate intra-industry levels in the G-3. The most

widely used indicator to measure the extent of intra-industry trade is Grubel and Lloyd�s

index. It calculated the part of balance of trade (overlap between exports and imports) in all

trade in a given industry j20:

The intra-industry trade calculated by Grubel and Lloyd index has been criticised principally

for its aggregation-calculated levels. In fact, the basic problem is in the use of industry-trade

classifications with a low detailed product degree. Low desegregation levels in the statistical

information can produce another problem. In this way, an important proportion of intra-

industry trade could be caused by an insufficient desegregation, either geographical or in the

industry sectors.

According to Fontagné and Freudenberg these problems can be corrected, calculating the

index only with the bilateral flows and with a maximum desegregation level. Therefore, to

aggregate the result, Fontagné and Freudenberg proposed a straightforward procedure: for

example the average Grubel and Lloyd indicator of intra-G-3 trade flows for industry j in year

t is obtained by summing up over declaring countries k, partner countries k’, and the

products I being part of industry j:

Σ Σ Σ [ (Xkk�it � Mkk�it] k∈ G-3 k�∈ G-3 i∈ j G&Ll G-3 j,t= 1- --------------------------------------- Σ Σ Σ [ Xkk�it + Mkk�it]

k∈ G-3 k�∈ G-3 i∈ j

20 See: Fontagné and Freudenberg �Intra-industry Trade Methodological Issues Reconsidered�, 1997 page 21.


In this way, in the study we opted for using the Grubel and Lloyd adjusted index, with

bilateral trade analysis flow and a high desegregation level. For the calculated G&L

indicator we used the Standard International Trade Classification (SITC) revision 2, 5

digits divided into 420 subgroups and 1832 products approximately. In order to

reduce the underestimation and overestimation in the analysis the IIT index was

calculated on the basis of statistical information in the three countries. According to

the ALADI trade statistical information presents an inconsistency caused principally

by some factors:

a) Statistical trade system used in each country,

b) Classification criterion,

c) Trade register transaction,

d) FOB and CIF estimation,

e) The cover degree in the statistical information in each country.

The calculation of the IIT index for all products allowed the whole of trade of the

countries in intra or inter-industry trade to be classified. To facilitate a numerical

presentation and, in accordance with Fontagné and Freudenberg, we used a

classification system including low two-way trade.

3 INTRA-INDUSTRY TRADE IN THE G-3

The analysis of intra-industry trade in the G-3 has being calculated for the three bilateral

flows, by product, as follow as: Colombia-Mexico, Colombia-Venezuela and Mexico-

Venezuela. The statistical methodology developed in the last section is employed in the

present section to estimate the G&L index for the period between 1994 and 2000.

Concerning the IIT global index for the G-3, we calculated six indexes (one for each

country), and the final result is the global average of these six calculations.

The figure IV indicates the evolution of G&L indicator in each industry sectors of the SITC

in the G-3. Examinations of figure IV shows that there is a considerable variance between

different industrial sectors among the measures of IIT. The considered time period was

characterised by an increase in the IIT for manufactured goods.


Figure IV

1: Grubel and Lloyd index Source: Author�s calculations on the basis of table IV.

Indeed, only three industrial sectors - manufactured goods (6), chemical products (5),

and crude materials- had an average above 5 per cent. The prevalence of significant

intra-industry trade measured in the two last sectors, clearly can be a phenomenon

caused by trade structures in these countries.

Table IV

1: Grubel and Lloyd index. Source: Author�s calculations.

Group of Three: intra-industry trade evolution by section1

0

1

2

3

4

5

6

7

8

9

10

1994

1995

1996

1997

1998

1999

2000

0 Food and live animals

1 B everages and tobacco

2 Crude matter.Expfood/fuel

3 M ineral fuel/lubricants

4 Animal/veg/o il/fat/wax

5 Chemical productsN.E.S

6 M anufactured goods

7 M achinery, Transportand Equip.

8 M iscellaneus. manuf.arts.

1994 1995 1996 1997 1998 1999 20000 Food and live animals 5,12 4,58 2,74 3,62 3,41 3,92 4,091 Beverages and tobacco 0,95 0,55 1,46 0,45 0,98 3,59 0,902 Crude matter.Exp food/fuel 2,16 4,01 3,48 5,12 5,57 6,78 5,303 Mineral fuel/lubricants 0,43 0,20 0,90 1,46 1,19 2,76 0,474 Animal/veg/oil/fat/wax 3,60 0,26 0,95 1,79 5,15 0,26 1,445 Chemical products N.E.S 7,16 5,57 4,97 6,21 6,56 6,89 6,226 Manufactured goods 5,48 5,89 6,51 6,22 6,83 8,57 8,707 Machinery, Trasnsport and E 3,98 2,05 2,11 1,91 2,34 2,65 2,418 Miscellaneus. manuf. arts. 5,81 3,38 4,50 5,20 4,73 4,30 4,51


In fact, Mexico and Venezuela are actually the most important oil and chemical

exporters in the region. Only the manufactured goods sector showed an import

evolution in this time period. Others industrial sectors in the G-3 revealed irregular

behaviour. Between 1994 and 1997, these sectors increased to just below 5 per

cent, with no significant participation in the intra-industry trade

Table III

Trade Intra-group by Trade Types

Source: Author�s calculations.

A more desegregate examination of IIT could be realized for chapters of SITC rev 2.

The methodology consists of a calculation of the G&L index for each chapter. The

analysis criteria are based on the G&L degree, in this way: �one way chapters�

(inter-industry trade) which G&L index less or equal to 10 per cent; �two way trades�

(low trade) with an index between 10 and 30 per cent, and finally �two way

significant trade� with an index higher than 30 per cent.

Table III presents the intra-group trade distribution in these three groups. In this

way, between 1994 and 2000, one way trade chapters decreased notoriously

thanks to best chapter participation in the two way trade principally in the �low�

section. Nevertheless, one-way trade participation between 1994-2000 reached

more than 50 per cent of the intra-group trade and most of industrial sectors

continue with low dynamism in the block trade.

Between 1997-2000, global participation in one-way trade �low� showed an

evolution towards two ways trade, principally in �low two way trade�. The increase in

the �significant trade� was not really important. In this period of time only three and

four chapters passed to this level.

Year Trade Two ways trade Trade Two ways trade"one way" "low" "significant" "one way" "low" "significant"

(trade average) (Chapters numbers of the SITC)1994 67.21 9.83 22.95 41 6 141995 70.49 13.11 16.39 43 8 101996 67.21 16.39 16.39 41 10 101997 63.93 16.39 19.67 39 10 121998 60.55 9.83 29.5 37 6 181999 54.09 19.67 26.22 33 12 162000 50.81 21.31 27.86 31 13 17


Figures V and VI

Source: Author�s calculations on the basis of table III.

Figures V and VI, shows IIT evolution like trade average and for chapters by trade

types. The most important evolution was experimented in the two ways trade �low�,

increasing 6 chapters in 1994 to 13 in 2000. This trade type variation could indicate a

higher level in the intra-industry trade in the different industrial sectors, thus the intra-

group trade starts to reduce its inter-industry character, based on the comparative

advantages.

3.1 Evolution of the G&L indicator in the G-3

The study of the intra-industry trade for the G-3 basically lies with the average

between three intra-industry bilateral indexes. Therefore, an estimation of this index

could certainly present underestimation caused principally by the desegregation

levels and by the trade information differences between countries. The growth of the

intra-industry trade has an important correlation with the tariffs reduction process in

the G-3, and another degree with the phenomenon of the geographical proximity.

Intra-group trade by Trade Types (trade average)

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000

one w ay low signif icant

Trade intra-group: by Trade Types (trade chapters of SITC)

0

5

10

15

20

25

30

35

40

45

50

1994 1995 1996 1997 1998 1999 2000

one way low significant


Figure V


It should be mentioned that IIT theory suggests that comparing partner�s countries in a trade

agreement, demand influence and similar structure production could have influence in the

results, as in the case of G-3.

In this way, the customs reduction process for industrial goods did not have an overall

positive effect in the group (except for bilateral IIT between Colombia and Venezuela). On

the other hand, between 1995 and 1998, intra-industry trade presented a degradation of the

index. (see: Figure V).

In 1995, the IIT global index reached 22.99%, but in 1996 intra-industry trade decreased to

16.34%, and in 1997 increased to 18%. This small degree in the IIT could be explained by

some factors: First In 1995, Mexico rose from a negative balance after suffering a financial

debt crisis, an important negative effect was the Mexican peso devaluation. This effect,

normally called �Tequila effect�, produced a loss in the competitiveness of Colombian�s and

Venezuelan�s products naturally reducing the industrial exports from Mexico. Second, the tax

reduction process in the G-3, is favored only in most Mexican�s industry products in the short

term. Third, the Mexican integration into the NAFTA, had a priority for Mexicans exporters to

conquest the biggest important market in the world. Thus, trade with G-3 members had to be

Group of Three: Intra-industry trade evolution (Grubel and Lloyd index)

0

5

10

15

20

25

1994 1995 1996 1997 1998 1999 2000


relegated between 1995 and 1997 causing a deceleration in the bilateral flows.

Compared to other intra-industry trades in the region, the G-3 was a significant share of the

regional trade. In the 90�s, some countries presented important IIT levels, in particular:

Argentina (31%), Brazil (27%), Uruguay (20%) and Colombia (20%). These figures are the

result of the liberalization of trade policies, especially the new regional integration process

which was started at the beginning of the 90�s21.

Analyzing bilateral trade flows in the region, we could note some bilateral relation with an

important IIT level, especially influenced by the proximity phenomenon and integrationist

process in the region. Principally, IIT in Latin-American countries (except Mexico) is

concentrated in the MERCOSUR countries.

However, regional intra-industry trade is localized in a reduced bilateral trade relations, in

particular Mexico, Brazil and Argentina. Brazil-Chile, Brazil-Mexico, Colombia-Venezuela

and Argentina-Chile represent 5% of the ALADI�S intra-industry trade. In this context, G-3

has big potential in the bilateral regional flows that we will explain in next section.

3.2 Intra-group IIT trade flows

In the last paragraphs , we described a survey of global intra-industry trade G&L index by

industry in the G-3. Nevertheless, to observe more clearly the intra-industry trade behavior,

we will explain the bilateral evolution of G&L IIT index for the three countries.

Following this approach, we analyzed bilateral trade flows between Colombia, Mexico and

Venezuela. First, this article presents the Grubel and Lloyd measure for the bilateral trade

flows:

a) Colombia-Mexico

It was in 1994 that the trade bilateral relation between Colombia and Mexico presented more

significant levels. In 1994, the Grubel and Lloyd index was only 12.57%, and 8.27% in 1996.

This indicates to us a weak intra-industry trade presence between the two countries during

the first three years of G-3. From 1997, IIT index, intra-industry trade presented again a

slight growth of 3.78% compared to the previous year. In 1999 and 2000, the lIT index

showed more significant levels of 23.35% and 20.35% respectively. (See: Figure VI).

21 See: ALADI, �El Comercio Intragregional en los años Noventa�, 2000.


Figure VI

Source: Author�s calculations. 1 Grubel and Lloyd index

According to the desegregation of the SITC by sections, we found a first observation, in

sections such as: the manufactured articles, machines and transport equipment had more

significant IIT bilateral levels. In a more desegregated level of the SITC rev.2, two digit

sections such as the products medicinal and medical (54), rubber goods (62), highway

vehicles, furniture (82) and shoes (85) had significant intra-industry trade levels. With the

maximum level of desegregation by product of SITC, in 1996, some products reached

interesting degrees of intra-industry, in particular: hydroxide potassium (44.51%), textile

fabrics (72.36%), machinery and equipment N.E.P. (83.56%), spare parts for machines

(70.95%), cotton shirts for men and children (79.11%), and other articles N.E.P. (65.82%).

Interpretation of the Grubel and Lloyd index for the bilateral trade between Mexico and

Colombia is: in general, IIT is rather low compared to the Mexican share in the regional trade

industry, which indicates that in the first three years, bilateral intra-industry trade was not

stimulated by the liberalization trade process of G-3, and also that Mexican integration in the

trade agreement was largely limited by the participation of Mexico in the NAFTA. In 1997,

with the G-3 revitalization, the IIT index between Colombia and Mexico strongly increased,

but with levels always too low in the intra-industry trade. We can observe a growth IIT

predisposition between 1999 and 2000.

Group of Three: bilateral intra-industry trade 1994-20001

0

5

10

15

20

25

30

35

1994 1995 1996 1997 1998 1999 2000

Col-Mex Col-Ven Mex-Ven


a) Colombia-Venezuela

The Intra-industry trade bilateral index showed a higher degree than that of Colombia

and Mexico. It indicates to us that the IIT between Colombia and Venezuela was

more integrated and rather fortified by the creation of G-3. For example, in 1985,

bilateral IIT was only 2.9%, while the same index, in 1990, increased to 9.8%, in spite

of the benefit of the tariffs reductions rates within the Andean Pact.

Table IV

Group of Three: Intra-industry G&L Index


Although, intra-industry trade increased considerably between 1990 and 1993, a true

growth IIT has finally been observed since 1994. The bilateral Grubel and Lloyd

index, between 1990 and 1995, increased to approximately 5.29%. But indeed, with

the beginning of agreement, intra-industry trade revealed a significant growth. In

1995, the bilateral IIT index climbed to 31.65%, which means a progression of

16.56% compared to previous year.

As can be observed in table IV, bilateral IIT was much more significant than for the

other two flows. But, since 1996, the Index has decreased considerably to 20.35%

the same year. Between 1997 and 2000, intra-industry trade presented a rather

irregular fluctuation. For example, in 1998, the IIT index fell to 23.10% while in 1999,

there was an improvement of the index by 4.57%. In conclusion, the bilateral IIT

observed more significant levels and a stabilization of its growth, after 1996, with an

average growth of 3.17 per cent .

The principal SITC�s sections with an important intra-industry are, in particular: freight

goods vehicles (9.2%), medical drugs (9.9%), spare parts and accessories for cars

(2.4%), car tyres (1.7%), truck tyres and inner-tubes (1.6%), aluminum and its alloys

1994 1995 1996 1997 1998 1999 2000Colombia-Mexico 12.57 12.42 8.26 12.04 11.71 23.35 20.34Colombia-Venezuela 15.08 31.65 20.35 21.59 23.10 27.66 24.81Mexico-Venezuela 20.47 24.90 20.40 20.34 20.26 19.84 19.25Total G-3 16.04 22.99 20.40 18.00 18.36 23.62 21.47


In conclusion, the experience of the free trade zone in the Andean Pact between the two

countries, as well as the proximity phenomenon were the decisive points for increasing

bilateral trade. By import volume Venezuela it is the second intra-industry trade partner of

Colombia after the United States and the first at regional level.

a) Mexico-Venezuela

Intra-industrial bilateral trade between Mexico and Venezuela is mainly concentrated in the

manufactured section articles of the SITC, specifically the section: other semi manufactured

products, such as for example the chapters: 6251 (tyres normally used by cars), 6572 (fibre

and fabrics agglutinates without weaving, and 6951 (tools to work by hand). The section

machinery and transport equipment also takes an active part in the bilateral trade, in

particular: chapters 7161 (engines generating DC electricity), 7492 (parts of valves and

fittings including the valves). And finally, in a less significant proportion, the section various

manufactured articles, for example: 8946 (the chapter non-military weapons and munitions).

The Grubel and Lloyd index analysis between the two countries showed that, before the

creation of G-3, intra-industry trade amounts were already more significant. Besides, the IIT

evolution also shows a weak growth of this trade.

In 1995 the IIT index increased by 6.05% in relation to the previous year. This IIT growth

coincides with the liberalization of markets in the three countries. But from 1996, the IIT

index did not really have a significant advanced manner (see: Table IV), with a negative

evolution rather during last four years of the period analyzed. It would have to be mentioned

that the figures of bilateral trade were less significant than the cases of A and B in this study,

but on the other hand participation in the total of the IIT index was much more significant.

The most important relationship in the intra-industry trade evolution between Colombia and

Venezuela was more significant in relation to the G-3, and indeed, is more developed due to

the trade agreement. Compared to IIT between Mexico and Venezuela, the G&L index has

always had a rather stable level in the bilateral relationship, which indicates clear benefit

from trade liberalization in the G-3.


Conclusion

Intra-industry trade, based upon similarity of nations, may lead to cost free adjustments,

increased efficiency and welfare gains associated with variety. In contrast, inter-industry

trade, traditionally associated with comparative advantages of nations, may lead to more

costly adjustments, as trade and specialisation move factors to and from contested export

oriented industries22.

The trade liberalisation process might help to increase intra-industry levels, but Latin-

American trade structures were basically characterised by mono-product exports in the 70�s

and 80�s. In this context, IIT evolution in the G-3 needs a high diversification level as well as

high export product variety.

The large increase in intra-industry trade in the G-3 in the last few years are two

phenomenons, which might be associated with the tariffs reduction process. But also

another economic event had an influence in the evolution of the intra-industry trade in the G-

3, principally the Mexican debt crises in 1994.

Concerning tariffs reduction process we can mention:

First, the tariff reduction process in the G-3 was programmed in three stages, which

favoured principally Mexican�s products insertion in the short term (5 years). That means

that Colombian and Venezuelan products with comparative advantage were allocated in

the second tariff reduction between the 5th and 10th year of the tariff reduction process.

Second, most Colombian goods between 1994-1997, exported from Mexico were not

industrial products limiting intra-industry evolution.

Furthermore, bilateral intra-industry trade evolution was largely influenced by the regional

integrationists process, in particular trade relations between Colombia and Venezuela in the

Andean Pact. Mexican insertion in the G-3 depended on new expansionist trade policy due

to good product competitiveness and good knowledge of the Colombia and Venezuela

markets.

Thus, the empirical evidence of intra-industry trade in the G-3 results in a complex

relationship between Colombia and Venezuela, influenced by new regionalism in the 90�s,

22 European Commission, 1990.


but especially the trade liberalization process in the region which allowed creation of new

trade agreements in the region.

Intra-industry trade by types showed that in the G-3, IIT levels increased between 1994 and

2000 meaning that intra-group trade depends less on comparative advantages. Between

1997-2000, IIT in the G-3 presented more significant intra-industry levels.


Network of intra-Group of Three merchandise by product, 1994-2000 (US$ Millions)

b. includes unspecified destinations and origins. Source: Author�s calculations.

Exports 1994 1995 1996 1997 1998 1999 2000

i Agricultural products 113,38 204,88 170,02 140,82 309,69 261,69 260,08

Food 102,22 178,40 143,46 129,60 299,81 241,22 237,91Raw materials 11,16 26,48 26,56 11,22 9,88 20,46 22,17ii Mining products 31,88 59,70 30,77 63,52 55,31 75,35 61,92

Ores and other minéraux 3,61 6,41 5,08 5,37 5,15 5,09 5,85Fuels 18,24 29,68 12,45 36,54 29,80 51,92 35,18Non-ferrous metals 10,03 23,60 13,24 21,61 20,35 18,35 20,90B Manufactures 665,20 1150,47 1136,06 1799,34 1399,72 959,74 1345,67

i Iron and steel 55,98 58,30 76,31 84,77 99,30 29,45 40,40ii Chemicals 196,01 370,73 304,93 365,31 367,84 372,51 483,72iii Other semi-manufactures 92,73 119,39 93,42 127,80 139,83 161,01 198,11

iv Machiney and transport 38,98 238,88 391,70 896,73 439,95 77,21 213,11 equipment-Automotive products 17,85 80,74 16,41 398,29 177,43 77,21 213,11

-Office and telecom 19,76 37,09 30,43 47,80 40,05 34,35 42,96 equipment

-Other machinery 1,37 3,22 2,56 4,55 5,00 4,01 11,21and transport equipmentTextiles 48,17 95,45 99,78 116,36 100,58 94,27 109,60Clothing 105,39 129,57 72,30 79,18 87,62 82,84 151,28Other consumer goods 127,93 138,15 97,63 129,20 164,61 142,46 149,43

Total merchandise exportsb 930,77 1549,24 1467,75 2212,85 2037,21 1516,57 1926,47



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Bibliography

Asociación Latinoamericana de Integración ALADI (2000) El Comercio Intraregional de la ALADI en los Años noventa, Estudio 126, Abril 2000.

Asociación Latinoamericana de Integración ALADI (2000) El Comercio Intraindustrial en el Comercio Regional, Estudio 130, Noviembre 30.

Commission of the European Communities (1998) La nouvelle économie européenne, No. 35 mars, 1998.

Fontagné L. And Freudenberg M. (1997) Intra-industry trade methodological issues reconsidered, Work Paper n. 97-01 CEPII; 1997.

Fontagné L., Freudenberg M. and Péridy, N. (1997) Trade patterns inside the single market, Work Paper n. 97-07, CEPII, 1997.

Glejser, H (1983), Intra-Industry and Inter-Industry Trade Specialization: Trend and Cycle in the E. E. C. (1973-1979), in Intra Industry Trade. Grubel Herbert G, and Lloyd P.J. (1975) Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products, The Macmillan Press LTD. London, 1975.

Kol J. and L.B.M. Mennes (1983) Two-way Trade & Intra-Industry Trade, in Intra-industry Trade Empirical & Methodological Aspects, 1983.

Marvel, H.P. and E. Ray (1987) Intra-industry trade: Source and Effects on Protection, Journal of Political Economy 95, December 1278-91. Ruffin J. Roy (1999) The Nature and Significance of Intra-industry Trade, Federal Reserve Bank Dallas, U.S.A.1999.

Tharakan P.K.M. (1983) The Economics of Intra-industry Trade: A Survey. Empirical and Methodological Aspects, 1983, Vol. 4. Center for Development Studies. 1983.

Tharakan P.K.M and J. Kol (1989) Intra-industry Trade, Theory , Evidence and Extensions. Mc Millan, 1989.

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Testing intra industry trade in the group of three, comparative analysis between trade patterns...

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