Regional Trading Agreements and Intra-Industry Trade: The Case of the ANZCERTA

Empirical work on intra-industry trade (IIT) is almost 30 years old. From the earliest analyses of IIT, the phenomenon has been associated with Regional Trading Agreements (RTAs). An important motivation for this research is associated with the issue of adjustment costs; if most of the growth in trade resulting from the RTA is attributable to IIT, then the resource re-allocation costs in the short to medium term are likely to be lower. This is because IIT does not require inter-industry factor movements. In attempting to determine whether RTAs are associated with increases in IIT, previous researchers have looked at two questions: (i) whether IIT has increased following the formation of the RTA, and (ii) whether IIT is more important in intra versus extra RTA trade. To answer the first question, researchers have used movements in the value of the Grubel and Lloyd (1975, GL) index over time, while the second has been dealt with by comparing the value of the GL index for intra versus extra RTA trade. Employing the GL index in these ways to answer these questions can lead to error. In this paper, we develop a new methodology for analysing both of these questions which overcomes the problems associated with using the GL index. First, we derive a formula which decomposes the growth in total trade (TT) into the contributions of growth in IIT and net trade (NT). Second, we show how to measure the contributions of intra and extra RTA trade to the growth in a country's total multilateral IIT and NT. The focus of our study is on the effects of the Australia-New Zealand Closer Economic Relations Trading Agreement (ANZCERTA) on Australian and New Zealand trade. All our formulas are computed with data for 130 Australian and New Zealand manufacturing industries defined at the 3-digit level of the Standard International Trade Classification (SITC) for the periods 1981 to 1986 and 1986 to 1991.