Intra-Industry Trade, Traditional Trade Theory and its Extensions

The phenomenon of intra-industry trade was empirically observed and presented with some emphasis in studies carried out in the 1960s which dealt mainly with the effects of economic integration on specialisation in trade. This generally recognised1 origin of the study of intra-industry trade relates in particular to the effects of the Benelux founded in 19482 and the European Economic Community founded in 1958.3 These studies found that the increase in trade among the members of the integration scheme had taken place largely through specialisation in production and export of products of the same industries rather than of different industries. Such a finding of increased intra-industry specialisation was unexpected. The traditional trade theory predicted that it was specialisation of the inter-industry type that would follow trade liberalisation.4 This prediction was reflected also in empirical studies attempting to forecast the developments in trade that would result from the mutual tariff concessions intended by the countries of the proposed European Economic Community.5 These expectations were founded on the standard economic theory explaining specialisation in trade: the Heckscher-Ohlin theory. As is well known, this theory assumes industries characterised by production processes with constant returns to scale, producing perfectly homogeneous goods in perfectly competitive markets.