Intra-Industry Trade and the Single Market: Quality Matters

Analysing data on values and unit values of bilateral trade flows at a very detailed level (some 10,000 product items), we examine the nature of intra-EC trade over the period 1980-94, identify its general determinants and then estimate the specific impact of the Single European Market programme. Trade patterns are identified by breaking up total trade into three trade types: one-way (i.e. inter-'industry') trade, two-way (i.e. intra-'industry') trade in horizontally differentiated products, and two-way trade in vertically differentiated products. One of the main findings is that the observed increase in intra-'industry' trade in Europe is almost entirely due to two-way trade in vertical differentiation: thus, the 1980-94 period is characterized by a increasing specialization of countries along ranges of qualities within products, suggesting a 'qualitatively' division of labour in Europe. General determinants as well as direct and indirect effects of the single market in this evolution are assessed with an econometric model integrating country, industry and integration variables. We conclude that the first years of the Single market have neither validated the optimistic scenario entailed in ex-ante studies, nor led to a more pronounced inter-industry specialization of European members potentially associated with cohesion costs. Adjustments have taken place within industries, on the quality spectrum.