Determinants of Intra-Industry Trade in Intermediate Goods between the US and OECD Countries

Abstract

The increased importance of fragmentation in world trade has created an interest among trade economists to explain the determinants of trade in intermediate goods. A substantial part of trade in intermediates between the US and OECD countries takes the form of intra-industry (IIT). I have divided total intra-industry trade into its horizontal and vertical components. Vertical IIT is defined as the exchange of intermediates which belong to the same industry but which are located at different stages on the production spectrum. Horizontal IIT is defined as the exchange of intermediate goods belonging to the same industry but differing in terms of characteristics or technological specifications, which are technologically unrelated. Hypotheses drawn from Ethier (1982) and Feenstra and Hanson (1997) are put forward to investigate the intra-industry trade in intermediates between the US and other selected OECD countries for the period of 1990-1996.To test these hypotheses, I have utilized three-way fixed effects and random effects models. The results confirm the hypothesis that the determinants of vertical and horizontal IIT in intermediates differ. Empirical results show that horizontal IIT is positively related to the size of markets and foreign direct investment, while it is negatively related to differences in human capital endowments and geographical proximity. On the other hand, vertical IIT is positively related to FDI, while it is negatively related to economies of scale.