SCALE ECONOMIES, INTRA-INDUSTRY TRADE AND INDUSTRY LOCATION IN THE "NEW TRADE THEORY"

JEL Classification F12, F15

Marius Brülhart

Department of Economics, Trinity College, Dublin 2, Ireland

Abstract

This 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.

Acknowledgements

Special 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.