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Intra-industry trade between European Union and Transition Economies. Does income distribution matter?

  • Hubert Gabrisch
  • Maria Luigia Segnana

EU-TE trade is increasingly characterised by intra-industry trade. For some countries (Czech Republic), the share of intra-industry trade in total trade with the EU approaches 60 percent. The decomposition of intra-industry trade into horizontal and vertical shares reveals overwhelming vertical structures with strong quality advantages for the EU and shrinking quality advantages for TE countries wherever trade has been liberalised. Empirical research on factors determining this structure in an EU-TE framework has lagged theoretical and empirical research on horizontal trade and vertical trade in other regions of the world. The main objective of this paper is, therefore, to contribute to the ongoing debate over EU-TE trade structures, by offering an explanation of intra-industry trade. We utilize a cross-country approach in which relative wage differences and country size play a leading role. In addition, as implied by a model of the productquality cycle, we examine income distribution factors as determinates of the emerging EU-TE structure of trade flows. Using OLS regressions, we find first, that relative differences in wages (per capita income) and country size explain intra-industry trade, when trade is vertical and completely liberalized and second, that cross country differences in income distribution play no explanatory role. We conclude that if increasing wage differences resulted from an increasing productivity gap between highquality and low-quality industries, then vertical structures will, over the long-term create significant barriers for the increase in TE incomes and lowering EU-TE income differentials.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 155.

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Date of creation: Feb 2002
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Handle: RePEc:iwh:dispap:155
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  1. Aturupane, Chonira & Djankov, Simeon & Hoekman, Bernard, 1997. "Determinants of Intra-Industry Trade between East and West Europe," CEPR Discussion Papers 1721, C.E.P.R. Discussion Papers.
  2. Hummels, D. & Levinsohn, J., 1993. "Monopolistic Competition and International Trade: Reconsidering the Evidence," Working Papers 339, Research Seminar in International Economics, University of Michigan.
  3. Gabor Hunya, 2000. "International Competitiveness Impacts of FDI in CEECs," wiiw Research Reports 268, The Vienna Institute for International Economic Studies, wiiw.
  4. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  5. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
  6. Aiginger, Karl, 1997. "The Use of Unit Values to Discriminate between Price and Quality Competition," Cambridge Journal of Economics, Oxford University Press, vol. 21(5), pages 571-92, September.
  7. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  8. Milanovic, Branko, 1998. "Explaining the increase in inequality during the transition," Policy Research Working Paper Series 1935, The World Bank.
  9. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  10. Bergstrand, Jeffrey H, 1990. "The Heckscher-Ohlin-Samuelson Model, the Linder Hypothesis and the Determinants of Bilateral Intra-industry Trade," Economic Journal, Royal Economic Society, vol. 100(403), pages 1216-29, December.
  11. David Greenaway & Robert Hine & Chris Milner, 1994. "Country-specific factors and the pattern of horizontal and vertical intra-industry trade in the UK," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 77-100, March.
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