Trade Liberalization and Infra-Industry Specialization: The Australian Experience

Much of the growth in trade among the industrialised countries, and more recently among countries in the Asia-Pacific region, has taken the form of intra-industry trade (IIT). Australia has historically had one of the lowest shares of IIT among OECD countries. This paper examines how Australia's IIT has changed in the 1980s in response to the process of trade liberalization and completion of the CER pact with New Zealand. Towards this end, IIT indexes are estimated for Australia's multilateral and trans-Tasman trade for 1981 and 1991 for 132 industries using data at the 3 and 4-digit level of the SITC. The results point to a sharp increase in the share of IIT for both multilateral and trans-Tasman trade. We also find that the industries that had undergone the largest reductions in protection levels had also increased their shares of IIT quite considerably. These findings suggest that the short to medium run adjustment costs associated with trade liberalization are likely to be lower than expected as a result of increased intra-industry specialization. If IIT continues to grow in response to the on-going process of internationalisation of the Australian economy, then Australia's prospects for expanding its share in world trade, and particularly in the Asia-Pacific region, are likely to be significantly boosted.