International Business: Types of Trade Flows (Article Sample)

International Business
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Introduction
Economist define globalization as the international amalgamation of the capital, labour and commodity markets. Maddison, (2003) believes that since the dawn of the 19th century globalization has occurred in a two stage process, with the first concluding at the onset of World War 1 and the second commencing after World War 2 and continuing to date. Both of these episodes were characterized by an upsurge of trade and an increase in the quantity of output produced. This opened doors to other phenomena such as movement of labour, capital flows and integration of trade. In particular, the culmination of World War 2 brought with it a rise in world merchandise exports, whereby they increased by 8 per cent annually, over the 1870-1913 duration. The growth in trade however slackened in the subsequent period due to inflation that had been occasioned by monetary expansion regimes, shocks in oil prices and a general inadequacy of proper macroeconomic regulation policies. Trade however did bounce back during the 1990’s and this was driven by ground breaking innovations in Information Technology (IT) which brought with it efficient production techniques such as economies of scale. On the basis of this information, this study is going to assess the trade flows that constituted growth in world trade among other things.
Types of Trade Flows
Lloyd, (2002) points out the fact that there are two forms of international trade, namely one way trade and two way trade. One way trade occurs whereby one country may export its commodities and services to another without necessarily purchasing anything in return. There are several factors that may lead to one way trade arising such as specialization, this is where a country may perfect the production of a certain unique good or service. Comparative advantage can also lead to the occurrence of this type of trade, whereby a country may enjoy an upper hand in terms of climate and other conveniences over its trade partner thus leading to trade being skewed towards its favour. Most countries however practise two way trade, which is a form of intra-industry merchandising which focusses in the trade of comparable products. These comparable products can either be differentiated vertically or horizontally. Vertical differentiation manifests when a variety of commodities portray a similar quality, whereas the latter occurs when different goods are of different quality. This distinction is vital because country characteristics that are correlated to intra-industry trade may vary, depending on the methods of differentiation (Beath, & Katsoulacos, 2011).
Horizontal and Vertical inter industry trade are the two trade flow types that have determined the recorded growth in world trade in the post-World War 2 era. Horizontal trade highlights the trade in which a country simultaneously exports and imports commodities that are in the same category. It is a common occurrence for different countries to export and import cars from one another. For instance, Germany exports the Porsche, Volkswagen and Mercedes brand of cars to Britain while at the same time importing the Ferrari brand from Italy and this is the same case for other commodities as well. This raises the question, why import cars instead of a totally different commodity? The answer according to Gandolfo, (2013) is product differentiation. Due to the varying taste and preferences of different people, an individual may not necessarily be attracted to a particular brand despite the fact that it originates from his/her home country. However, they may be attracted to another product differentiated by its appearance, class, or even price that is made in another country.
Vertical intra-industry trade on the other hand focusses on the concurrent import and export of products which despite being in a similar sector are at different stages of production (Gandolfo, 2013). This type of trade is usually carried out so as to make the best out of the local conditions of different countries. China for instance takes advantage of its abundant labour force to import and assemble technology intensive components before exporting them back to America and Europe. These type of trade flows also has also dominated parts of Africa and the Middle East over the past decades and it has led to the exponential growth of their respective economies. In the following section we shall delve further into vertical intra-industry trade in China as we also asses some of the underlying statistics.
Vertical Intra-industry trade in China
Zhang, (2004), believes that intra–industry trade has become extremely vital to the development of China as a transition Economy. With the onset of the 1970’s came the liberalisation of the Chinese economy and this was a stepping stone to the positioning of China as a world leader in trade. Liberalisation enabled China to increase its export to the Organisation for Economic Corporation and Development (OECD) countries such as USA and the United Kingdom to the tune of a mean annual payoff of 28.8% for the period starting 1978 to the year 1993. Further still, the percentage of manufactured goods increased in total exports from a figure that was less than 50% in the 1970’s to a figure that exceeded 80% by the year 1992. This increase in trade reflected positively on the country’s gross domestic product and its per capita income also improved by an average of 7.6% for the 1980-1992 period. Further still, the country carried out protective measures to the import side by exercising both tariff and non-tariff barriers that ensured a positive balance of payment and an even faster economic growth rate (Dinello, & Shaoguang, 2009). However, the OECD countries did raise the concern about whether China was benefiting more than its fair share from the intra-industry trade. Another point of contention came from how China carried out its vertical two–way trade. Based on the factor endowments advantage that China had over the OECD countries, it was all too obvious that the country had to engage in vertical trade. Nonetheless, concerns were raised at the quality of product that China was churning into the world market while still importing higher quality goods from the OECD. The following section shall analyse empirical data from various secondary sources in relation to trade in China.
China’s Intra-Industry Trade
In order to ascertain the level of vertical intra-industry commerce, the Grubel-Lloyd index is employed (Kreinin, & Plummer, 2004). Once the level of a country’s imports and exports have been ascertained then they can be calculated using the following mathematical representation.
GL sector I = 1-{ export (Sector 1)-Import (Sector 1)export (Sector 1) +Import (Sector 1)}
The larger the resulting figure, the larger the level of intra-industry transactions in relation to the total trade. In the case that intra-industry trade is non-existent, then the index shall reflect a value of zero and the contrary also applies whereby the index would be one if all the transactions were composed of intra-industry commerce. The following data highlights the development of the Chinese trade with OECD manufactures for the period between 1980 and 1992.
Year

Intra-Industry Trade

Year

Intra-Industry Trade

1980

0.125

1987

1.170

1981

0.136

1988

0.196

1982

0.141

1989

0.204

1983

0.138

1990

0.213

1984

0.131

1991

0.217

1985

0.099

1992

0.207

1986

0.119



Data sourced from the Organisation for Economic Co-operation and Development implex, (2009).
An analysis of the above data reveals that the Intra-industry trade has increased from 12.5% in 1980 to 20.7 % in 1992. Despite the fact that the value of merchandise exports had steadily been rising for this period, the volume of merchandise imports was fluctuating due imposed import regulations. The larger figures in intra-industry trade correspond to the increase in the volume of imports. According to the OECD implex data, (2009), the above figures might be indicative of the possibility that import barriers might actually be impeding intra-industry commerce in China’s key exporting zones.
There is a pattern from empirical studies that show that intra-industry transactions increases in relation to the extent of development of a country (Pelzman, 2017). This is certainly the case when it comes to China. The highest trade indices recorded are with the United Kingdom and Japan. In contrast Iceland, Greece, Turkey and Portugal account for very low intra-industry trade indices with China as shall be elaborated by the table below.
Total China-OECD Manufacturing Trade

Country

Exports

Imports

IIT with China

United Kingdom

2.2

2.5

0.188

Japan

41.4

17.8

0.205

Iceland

Less than 0.01

Less than 0.01

0.002

Greece

0.1

0.4

0.006

Turkey

0.5

0.2

0.027

Portugal

Less than 0.01

0.2

0.0021

Data sourced from the Organisation for Economic Co-operation and Development implex, (2009).
The OECD implex data, (2009) reveal that China’s net exports from 1980 to 2015 averaged USD 593.34 billion, hitting an all-time hig...