Trade between Similar Economies
Countries with similar economies are more likely to trade with one another, especially if they are at a similar development level, have political or security partnerships, or have cultural ties. Why might that be? Consider that qustion as you read this section, and then answer the questions at the end of the section.
The Prevalence of Intra-industry Trade between Similar Economies
The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Roughly half of all world trade involves shipping goods between the fairly similar high-income economies of the United States, Canada, the European Union, Japan, Mexico, and China (see Table 14).
| Country | U.S. Exports Go to … | U.S. Imports Come from … |
|---|---|---|
| European Union | 19.0% | 21.0% |
| Canada | 22.0% | 14.0% |
| Japan | 4.0% | 6.0% |
| Mexico | 15.0% | 13.0% |
| China | 8.0% | 20.0% |
| Table 14.Where U.S. Exports Go and U.S. Imports Originate (2015) | ||
Moreover, the theory of comparative advantage suggests that each economy should specialize to a degree in certain products, and then exchange those products. A high proportion of trade, however, is intra-industry trade - that is, trade of goods within the same industry from one country to another. For example, the United States produces and exports autos and imports autos. Table 15 shows some of the largest categories of U.S. exports and imports. In all of these categories, the United States is both a substantial exporter and a substantial importer of goods from the same industry. In 2014, according to the Bureau of Economic Analysis, the United States exported $159 billion worth of autos, and imported $327 billion worth of autos. About 60% of U.S. trade and 60% of European trade is intra-industry trade.
| Some U.S. Exports | Quantity of Exports ($ billions) | Quantity of Imports ($ billions) |
|---|---|---|
| Autos | $146 | $327 |
| Food and beverages | $144 | $126 |
| Capital goods | $550 | $551 |
| Consumer goods | $199 | $558 |
| Industrial supplies | $507 | $665 |
| Other transportation | $45 | $55 |
| Table 15.Some Intra-Industry U.S. Exports and Imports in 2014 | ||
Why do similar high-income economies engage in intra-industry trade? What can be the economic benefit of having workers of fairly similar skills making cars, computers, machinery, and other products which are then shipped across the oceans to and from the United States, the European Union, and Japan? There are two reasons: (1) The division of labor leads to learning, innovation, and unique skills; and (2) economies of scale.