Intra-Industry Trade In Australia Samples †MyAssignmenthelp.com

Question: Discuss about the Intra-Industry Trade In Australia. Answer: Introduction Over the past decades, trade has become an important part of the modern economy. Fundamentally, trade refers to the exchange of services and goods between individuals, firms, and countries. Mainly, trade exists due to specialization and division of labor, whereby individuals and firms specialize in the production of certain goods and services. There are various forms of trade today, among them inter-industry trade and intra-industry trade. Intra-industry trade refers to the trading in similar products that belong to the same sector. In contrast, inter-industry trade (IIT) pertains to the exchange of services and goods that are dissimilar and belong to different sectors. Typically, it is trading between countries where imports and exports consist of different types of commodities. Notably, trade often exists between regions due to the fact that different regions have different resource endowments, hence possess comparative advantages in the production of certain commodities. According to the article Gas curbs will hurt LNG exports and national interests, published in The Australian, Paul Kerin explains how the LNG export restrictions that were imposed by the countrys prime minister will adversely affect intra-industry trade in the Australian economy. The new restrictions impose limitations on IIT in LNG between Australia and its trading partners. Mainly, the decision is based on the fact that LNG imports are more expensive than the exports from the country. In turn, this creates a situation where the local prices for gas are higher than the export prices from the country. Hence, it is viewed that the country is getting worse off due to trading in the product, instead of gaining significant benefits from the trade. For this reason, the government seeks to impose restrictions on the trading of the product in the country. The Concept Intra-Industry Trade Essentially, IIT arises when the Australian economy imports and exports the same type of products and services. Here, the similarity of the product is identified in terms of the sector in which the goods or service belong to (Kerin, 2017). Notably, according to the article, Australia takes part in intra-industry trade of LNG gas. The economy exports gas o countries such as US and Japan and also imports the product from them (Kerin, 2017). Over the years, IIT has become an indispensable part of the functioning of modern economies. The most basic question that arises in this form of trading is why economies of the world partake in the exchange of the same goods and services. Under the traditional economic theory, this form of trade is impossible. In the traditional model, countries engaged exclusively in inter-industry trade in order to partake in the exchange goods and services that were dissimilar. As such, exchange goods and services which the individual economies could not produce on their own due to lack of factor endowments for their production. Profoundly, this model was founded on the concept of comparative advantage, and economies only engage in the manufacturing of services and commodities in which the nation possess a competitive and comparative advantage. However, the concept of IIT allows for the trading of similar goods and services between economies. Primarily, the occurrence of trade in the same commodities can be explained using Paul Krugmans New Trade Theory. According to this theory, countries specialize in the production of services and products in order to take advantage of increasing returns. This model parts from the neoclassical view that nations produce goods and services due to regional endowments. Hence, this allows economies to produce commodities and benefit from the increasing returns that arise from trading in the commodity. More specifically, it permits nations to specialize in the production of certain goods so as to receive returns. In addition to this explanation, the Heckscher-Ohlin-Ricardo model justifies an intra-industry trade on the grounds that nations with identical resources would still engage in an exchange due to dissimilarities in the level of technology (Davis, 1995). Typically, differences in technology between countries result in specialization, thereby allowing for trade to occur between countries. In turn, different countries producing the same product engage in the trade of the product, either homogenous or slightly differentiated. Thus, this gives rise to the concept of the type of IIT which includes the exchange of homogeneous products, horizontally differentiated products or vertically differentiated goods. Today, IIT is held accountable for influencing the unexpectedly huge growth of industrial trade among most economies in the world. In fact, it is responsible for a significantly large proportion of the aggregate international trade among these economies. Types of Intra-industry Trade It is important to distinguish between the types of IIT for products and services within the economy. Horizontal intra-industry trade. Typically, this pertains to the trading in exports and imports that are categorized under one sector. In this type of trade, the commodities traded are at the same stage of processing. For instance, Australia exports natural gas to Japan and the US and also imports the same commodity from the two countries. Thus, the traded product is in the same sector at the same processing stage. Hence, according to Kerins article (2017), the Australian economy is engaging in a horizontal IIT in the import and export of LNG gas with the US and the Japanese economy. Vertical intra-industry trade. Mainly, this form of trade occurs where the exports and imports that are being traded are classified under the same sector, but at different phases of processing. For example, Australia can export crude oil to the US and import petroleum from the same country. Thus, although crude oil and petroleum are classified under the same segment, they are at different phases of production. Characteristically, this kind of trade arises mainly due to the ability of countries divide the manufacturing process into numerous stages, each undertaken at varied locations in order to take advantage of technological factors and local conditions. Characteristics of the trade It is worth noting that intra-industry trade has significantly increased over the past few years among OECD countries. Aside from the types of intra-industry trade, there are various characteristics that are pertinent to this kind of trade. Essentially, the first characteristic pertains to the fact that intra-industry trade is high among economies that are open to trading such that their imports and exports account for a significantly large proportion of their GDP. In this case, this characteristic applies to the Australian economy. Australia is the 22nd largest exporter of goods and services in the world. It is also a major importer (ABS, 2017). Secondly, this trade mainly occurs among economies that possess preferential trade agreements. Notably, the Australian economy is a member of various FTAs and has signed trade agreements with countries such as Korea, Japan, Peru, and China (McGuirik, 2017). In turn, this has increased prospects for two-way investments between the countries as well as improved the competitive position of the countrys exports. Subsequently, this has facilitated intra-industry trade. Thirdly, the trade occurs mainly for sophisticated manufactured commodities such as transport equipment, chemicals, electronics, petroleum, and oil, among others. In this case, the production and processing of oil is a sophisticated process, hereby satisfying this characteristic. Measurement of Intra-industry trade Imperatively, it is crucial to point out that IIT is somehow challenging to measure statistically. Mainly, this can be attributed to the fact categorizing products and industries as the same is mainly based on definitions and classification. However, it is often measured using various indexes such as the Aquino index, the Glesjer index, The Balassa index, the Bergstrand index and Grubel-Lloyd index. Intra-industry Trade and Comparative Advantage It can be argued that just like inter-industry trade, IIT also arises due to the existence of comparative advantage in the production of services and products among nations. Fundamentally, the very definition of IIT suggests that there is a plausible connection between the two concepts in accordance with the Ricardian determinants of trade (FPO, n.d.). However, in this case, IIT represents trading in perfectly intra-industry goods. Besides that, comparative advantage in the production of commodities brings about the need for specialization and learning. As such, firms in different economies develop unique and different skills. The past few years has seen the splitting of specialization in the world economy. Nowadays, this trend is known as splitting up the value chain. Primarily, this describes how the product is manufactured in different stages. This is made possible by the fact that improvements in communication and technology in the world have improved the process of sharing information, thereby making it possible to disintegrate the value chain. Thus, instead of production in a single factory or country, the stages of production are split up among firms in various economies. Given the fact that the value chain is disintegrated, international trade usually involves unfinished products being trade between nations. Additionally, it involves the shipping of specialized good (Intra-industry trade, n.d.). What is more, IIT between similar countries results ineconomics due to the fact that it permits the labor force and firms to innovate and learn particular products by focusing on specified stages of the val ue chain. As a result, trading countries are able to gain significant benefits from this trade. One fundamental reason why Intra-industry trade between nations results ineconomic gains involves economies of scale. Basically, this refers to the condition in which as the scale of production increases, then the average costs of production declines up to a certain degree (Intra-industry trade, n.d.). Thus, countries that possess the advantage of economies of scale have relatively lower costs of production than those economies that produce at lower production rates. In turn, the presence of variations in the degree of economies of scale between trading nations allows for differences in prices between their outputs. Sequentially, this facilitates intra-industry trade between nations. Furthermore, in IIT the level of worker productivity depends largely on how the firms in different countries engage in specific learning about specialized products. At this point, the comparative advantage between countries and firms are dynamic (Krugram, n.d.). As such, they can evolve and change over time as new skills are developed. For this reason, countries are flexible in response to the changes in the comparative advantages between economies. Analysis of the Article Primarily, Paul Kerins article (2017) shades some light to the concept of intra-industry trade in the Australian economy. Predominantly, the article reports the proposed restrictions in the level of exports from the country as announced by Prime Minister Turnbull. According to Kerin, the decision was founded on false premises and ignored fundamental concepts of intra-industry trade thereby ignoring the dynamic consequences of this decision. From the article, one can deduce that Turnbull believes that domestic buyers of LNG paid a significantly higher price for the product than the price at which the product is exported from the Australian economy. For this reason, the Prime Minister was strongly against the Intra-industry trade for the reason that it resulted in capital losses than gains for the domestic economy. Ordinarily, countries and firms engage in trade with other agents in order to receive gains from the trade in the form of increasing returns. Thus, in this case, the basic reason for conducting IIT in gas between Australia and nations like Japan is not achieved. Mainly, this is due to the fact that domestic users of the product are affected by the fact that the local prices for the product in the country are higher than the export price (Intra-industry trade, n.d.). In turn, this implies that the Australian consumers of would be better off if the exports from the country were not exported, but instead diverted to the domestic market. According to the article, the domestic gas prices in the country do not reflect the international prices. More specifically, the domestic prices for the product are higher than the export prices and other international prices in the market. The netback prices of the exports are below the netback price on sales into major domestic destination hubs. Thus, although LNG is a tradable product, it possesses the characteristics of non-tradable resources. Ineconomic theory, a non-tradable product is one whose export price is lower than the domestic costs. In turn, this makes it irrational to sell the product at a lower price in the international market at the expense of the local market. In this regard, Turnbull is justified to advocate for the imposition of restrictions on exports from the country in order to protect domestic consumers from hiked prices. In his report, Turnbull insists that the Australian government is still committed to LNG exports, but this should not be done at the expense of the economys interest. He believes that it is better to save the supply of gas produced in the country in order to lower the local prices for the commodity. Fundamentally, this decision can be supported by economic theory such that it is better to secure lower prices for the product in the country. Predominantly, this is because high gas prices in the country have a ripple effect in the price level of other commodities in the economy because it is used in the production of other goods in the economy. Thus, high local prices for gas would force producers to pay more for the product, causing them to transfer these costs to the prices of their final output. Consequently, high prices of locally produced commodities would further reduce their competitiveness in the international market. In this regard, the decision to restrict exports of gas from the country is largely justified. However, proponents of interindustry trade strongly oppose this move. Instead, they propose that there are better ways to maintain domestic prices low. According to Kerin (2017), the government can control prices through improved regulation of gas pipelines in the country. Essentially, this is due to the fact that it accounts for a significant proportion of domestic end-user prices. In addition, he argues that the government can increase and enable new sources of gas supply in the country, thereby build and enhance the level of competition in the economy. Fundamentally, he proposes that instead of imposing restrictions on exports, restrictions be uplifted. Subsequently, a free market for gas would respond in the form of forces of demand and supply to keep the domestic prices in check. In addition to this, the removal of restrictions would make exports more competitive than imports in the local market. Consequently, this would allow the economy to reap benefits from intra-industry tra de with Japan on gas. It is noteworthy that Turnbull claims that the restrictions are temporary, and would be removed as soon as the domestic conditions in the gas market improve. Contrary to this view, Milton Friedman was of the opinion that most temporary programs initiated by the government are often permanent. For this reason, it would be misguiding to believe that the proposed restrictions would be temporary. Additionally, this also implies that imposing these restrictions on exports may become permanent, thereby worsening the intra-trade conditions in the country over the long term period. In turn, this would lock out the Australian economy from enjoying the benefits associated with intra-industry trade in gas related products. Thus, it is imperative to note that the proposed reductions in the short term prices through the imposition of restrictions on gas exports may work only over the short term period. However, the extension of the policy of the long term period would adversely affect intra-industry trade between Australia and its trading partners, as it would act as a significant barrier to free trade, which is imperative for the system to work. Besides that, this strategy would result in reluctance on the side of the government to initiate better methods to regulate pipelines and increase the supply of the commodity in the country. In turn, this would further worsen the trade conditions in the Australian economy. Profoundly, this would force the Australian economy to forego the benefits associated with free inter-trade and intra-trade in the economy. In this regard, the Australian government should restrict from imposing export restrictions and allow the market to readjust itself. This way, the nation would be able to reap the benefits of conducting in intra-industry trade in gas and associated products. Conclusion It is imperative to point out the fact that international trade has become a fundamental part of the operation of the modem economy. Nowadays, countries and firms take part in inter-industry and intra-industry trade. While inter-industry trade involves the exchange of different goods and services that belong to different sectors, intra-industry trade pertains to the exchange of commodities that are characteristically similar and belong to the same sector (Economics of Free Trade, n.d.). Predominantly, intra-industry trade arises due to the existence of variations in the level of technology, tastes and preferences of the consumers, and comparative advantages arising from economies of scale. Mainly, different countries engage in the production of similar products and trade in them in order to gain from the increasing returns resulting from the trade of these commodities. Thus, just like intra-industry trade, intra-industry trade is equally profitable for countries to engage in (Economi cs of Free Trade, n.d.). Notably, the Australian economy engages in both inter-industry trade and intra-industry trade with other nations. According to the article by Paul Kerin (2017), the economy engages in intra-industry trade in LNG gas. However, recently, the prime minister proposed an imposition of restrictions on the level of gas exports from the country following significantly high prices of imports compared to the low-priced exports from the country. Essentially, this decision would adversely affect the level of intra-industry trade between Australia and Japan, as it would reduce the volume of exports traded in the international market. As a result, this would lock out the economy from receiving the increasing returns associated with trading in the international market. Thus, the government should restrain from imposing the proposed restrictions in order to keep benefitting from the intra-industry trade in the commodity. References Davis, D. R. (1995). Intra-industry trade: A Heckscher-Ohlin-Ricardo approach. Journal of International Economics. 39 (3/4): 201226. Economics of free trade agreements not always black and white. [Online] Drive. Available at https://www.drive.com.au/federal-politics/political-opinion/economics-of-free-trade-agreements-not-always-black-and-white-zqrt9.html [Accessed 31 May 2017] Grimwade, Nigel (2000). International Trade: New Patterns of Trade, Production Investment (Second ed.). 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