The paper tells that there are two different forms of intra-industry trade: Horizontal intra-industry trade: this comprises of simultaneous imports and exports of products categorised within an identical industry, and at an identical processing stage, therefore, based primarily on product differentiation, as for example, Korea’ s export and import of cellular phones at the same time, at the same processing stage. Vertical intra-industry trade: This comprises of imports and exports of products at the same time within the same industry sector but at a different processing phase. It is based on a growing ability to arrange for production fragmentation into various stages, each occurring at different places, and taking advantage of conditions in the locality of production.
As for example, China imports computer parts from the western countries and uses its cheap labor power to assemble the imported parts in a labor-intensive final phase of production, before the finished product (computers) is again exported to the US and Europe. In the context of trying to place the concept of intra-industry trade within a frame of economic theories, a question arises, as to why countries concurrently export and import the same products, or products belonging to the same industry type?
In an answer to this question, Nigel Grimwade claimed, “ an explanation cannot be found within the framework of classical or neo-classical trade theory. The latter predicts only inter-industry specialization and trade” . However, this is not justified and inter-trade industry can be explained largely by economic theories. The traditional trade pattern was based on models proposed by Ricardo and the Heckscher– Ohlin model that attempted at construing activities that take place within the realms of international trade. In both the models, there is the notion of comparative advantage with an analysis of why nations choose to conduct trade.
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