SCALE ECONOMIES, INTRA-INDUSTRY TRADE AND INDUSTRY LOCATION IN THE "NEW
JEL Classification F12, F15
Department of Economics, Trinity College, Dublin 2, Ireland
AbstractThis paper exposes some common misinterpretations of the "new
trade theory". First, the view that high scale economies give rise to high
levels of intra-industry trade is challenged. It is shown that the
monopolistic-competition trade model predicts a negative relationship between
internal scale economies and intra-industry trade. Second, in spite of a common
perception that the "new" theory explains ever growing levels of intra-industry
trade in an integrating world economy, a scrutiny of the basic model indicates
that reduced distance costs result in lower intra-industry trade. However, if
temporary re-location rigidities are considered, integration entails an
initial surge of intra-industry trade, which eventually withers away, when the
centripetal forces towards inter-industry specialisation take over. This might
contribute towards an explanation for observed reversals of intra-industry trade
growth among industrial countries.
AcknowledgementsSpecial thanks to Kevin Hanrahan, Dermot McAleese and
Paul Walsh for helpful suggestions and to Paddy Waldron for essential computing
guidance. Earlier versions of this paper have been presented at the SPES
Workshop, University of Nottingham, September 1994, and at the "Journées AFSE"
in Nantes, June 1995.