Changing trends in North-South trade contexts? An assessment of the intra-industry trade patterns between Germany and Nigeria


Research Paper (undergraduate), 2016
35 Pages, Grade: 1,0

Excerpt

Table of Contents

Abstract

Acknowledgements

Abstract

1. Introduction

2. Literature review
2.1. Patterns conventional trade theory does not explain: Reviewing the analytical gaps of the Heckscher-Ohlin theorem
2.2. The emergence of alternative theories that incorporate intra-industry trade
Intra-industry trade between countries with similarly high per capita incomes: The first concepts of intra-industry trade
Intra-industry trade between countries with dissimilar per capita incomes: The different perspectives on North-South intra-industry trade
2.3. Recent expansions of North-South intra-industry trade models

3. Objectives and Methodology

4. Case Study: Nigeria’s trade with the “North”
4.1. Nigeria’s foreign trade profile
Overall trade structure and main trading partners
Trade patterns between the EU and Nigeria and the relevance of Germany
Recent bilateral intra-industry trade between Germany and Nigeria
4.2. The history of Euro–African (–Nigerian) trade agreements

5. Analysis: North-South intra-industry trade in a less diversified Nigerian economy
5.1. The persisting dominance of inter-industry trade in Nigeria
5.2. The modest but continuous development of Nigerian intra-industry trade with the Northern partner
5.3. The gradual move towards a Euro-African Free Trade Area and consequences for intra-industry trade in Nigeria

6. Conclusions

7. References

List of Tables

Table 1: Matrix of Nigerian trade in goods with main trading partners (in %), 2014

List of Figures

Figure 1: Bilateral trade flows between Nigeria/Germany and Nigeria/EU-28 (in billion USD), from 2005 – 2014

Figure 2: Inward FDI flows of the largest EU investors in Nigeria (in billion USD)

Figure 3: Development of bilateral intra-industry trade between Germany and Nigeria at the product level, from 2005 – 2014

Figure 4: Relative shares of bilateral intra-industry trade between Germany and Nigeria according to production chains, from 2006 – 2014 (with Germany being the exporter)

Figure 5: Relative shares of bilateral intra-industry trade between Germany and Nigeria according to production chains, from 2006 – 2014 (with Nigeria being the exporter)

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Abstract

The objective of this paper is to analyse whether and how recent North-South trade relations have been influenced by intra-industry trade patterns. The assumption is that there are continuous patterns of intra-industry trade within and outside the product categories the Northern and the Southern country trade with each other most commonly. However, they only represent a fraction of the otherwise dominating inter-industry type of trade. By analysing a case study of the bilateral trade between Germany and Nigeria, it is found that the nature of intra-industry trade is governed by two central causes: 1) the minor diversification of the Nigerian economy and low levels of trade in non-mineral products and 2) the revitalisation of traditional inter-industry trade dynamics brought about by the gradual move towards a Euro-African Free Trade Area.

Acknowledgements

I want to thank my supervisor, Sophie van Huellen, for her continuous support and commitment in this dissertation project as well as throughout my academic year at SOAS. I am also grateful for my family and friends who keep on encouraging me and providing me with helpful advice – in any given situation.

1. Introduction

In contradiction with the Heckscher-Ohlin (HO hereafter) model of international trade, it has been observed that countries do not only conduct inter-industry (exchange of goods according to the relative factor endowments) but also intra-industry trade (exchange of similar goods that are within an industry). Hence, intra-industry trade can take the form of either trading similar goods that are of different quality (horizontal) or trading goods that can be attributed to different production stages within an industry (vertical).

Following the presented arguments, intra-industry trade is particularly present among advanced economies as they share similarities in relative factor endowments, economic size and technological development. Therefore, they have resembling demand and preference structures (Gruble & Lloyd, 1975; Helpman & Krugman, 1985; Greenaway & Milner, 1986; Bergstrand, 1990). Thus, by focussing on the production of a specific type of a particular good, countries can exert economies of scale and reduce unit costs of production.

The fact that two countries which differ significantly in their relative factor endowments, size and technology also conduct bilateral intra-industry trade is yet to be explained by the established theories. Instead, the HO-theorem has been regarded as the most valid explanation for the existing North-South trade patterns. As a consequence of the deepened integration of the global economy and the expansion of multinational enterprises, however, the interest in the study of vertical intra-industry trade between developed and developing countries has increased simultaneously (Xing, 2007: 13). Here, among a number of various determinants, the literature identifies foreign direct investment (FDI) as the central factor that leads to intra-industry patterns in North-South trade.

The examination of the causes of how intra-industry finds its relevance in various sources. In example, some argue that intra-industry has the potential to stimulate innovations and exploit economies of scales in developing countries (e.g. Onogwu, 2014: 21). Next to these upgrading effects, another benefit can be regarded in the opportunity for smaller economies to overcome the long enduring dependency structures that are propagated by the traditional inter-industry trade of primary commodities in the sense of the HO-model.

This paper intends to examine whether and how recent North-South trade relations have been influenced by the development of intra-industry trade patterns. It is argued that there are continuous patterns of intra-industry trade within and outside the product categories the Northern and the Southern country trade with each other most commonly. However, they only represent a fraction of the otherwise dominating inter-industry type of trade. Moreover, it is assumed that the nature of intra-industry trade of the lesser developed country depends on the diversification of domestic production capacities in order to export a variety of products. Moreover, the architecture of the trade agreements that link both trading partners is expected to have a negative influence on the development of intra-industry trade if they are directed towards freer trade.

Following this introductory paragraph, section 2 first presents the assumptions and shortcomings of the HO-model before it discusses the theoretical work on North-North and North-South intra-industry trade. Section 3 explains the applied methodological framework. Section 4 provides an empirical case study of Nigeria’s foreign trade profile with a special focus on the bilateral trade with Germany. Section 5 examines the case study and communicates the findings. Section 6 concludes.

2. Literature review

For meeting the objectives of this paper, the theoretical foundations of the theory on intra-industry trade have to be reviewed. This gains particular interest if we consider that the conventional trade theory of the past 60 years or so has widely been disregarding the existence of intra-industry trade. Instead, trade is assumed to occur as an exchange of goods between industries (or “inter-industrial”) and, therefore, among structurally different countries. More precisely, these structural differences are attributed to the supply side of trade, i.e. illustrated in diverging per capita incomes, different relative factor endowments or productivity potentials.

However, alongside the surge of bi- and multilateral trade agreements resulting from deepened financial integration since the 1970s, the patterns of trade have changed as well. In example, new trade theory attempts to explain novel types of trade flows by breaking with the wisdoms of conventional trade theory. As for instance, it employs a wider range of variables such as imperfect markets and strategic behaviour of market agents in order to comprehend the complex trade dynamics (Deraniyagala & Fine, 2001: 812). Another approach tries to move beyond previous explanations by emphasising the importance of demand side variables as the crucial determinants of trade. In particular, the so-called Linder hypothesis posits that the heterogeneity of tastes and preferences for differentiated goods has increased the two-way trade between industrialised countries in the form of horizontal intra-industry trade (Linder, 1961). As these countries have similar factor endowments, it follows that the trade widely must be of an intra-industry character. The third HO-alternative explanation referred to in this literature review also loosens the strict supply side considerations of standard trade theory but discusses trade within a North-South context.

2.1. Patterns conventional trade theory does not explain: Reviewing the analytical gaps of the Heckscher-Ohlin theorem

Since the 20th century, international trade theory has been dominated by a neoclassical understanding centred around the HO-model as formulated by Eli Heckscher (1919) and Bertil Ohlin (1933). While the classical conceptualisation of trade in the Ricardian model is based on the utilisation of comparative advantages in the production of export goods, the HO-model reshaped trade theory by a) adding a second factor of production and b) assuming an identical level of technology between two trading nations. Hence, differences in the relative factor endowments capital and labour are assumed to be the main initiators of trade (Markusen et al., 1995: 99). According to this, countries are relatively abundant in either of these factors and will focus on the production and export of goods that use them extensively. Illustrated in an example, a country like Germany with one of the largest capital stocks in the world will concentrate on the production of capital-intensive goods and services such as machines, automobiles or financial services whereas a labour-abundant country like India will stick to the export of goods that mainly require labour force as an input.

Further, the HO-model is constructed alongside the assumption that the production functions of the goods show constant returns to scale. This means that the relation between input and output is proportional and no extra gains can be made within a production process. Additionally, it is presumed that the two factors are fixed both in quantitative (fixed amount of supply) and in qualitative terms (homogeneity of factors) within a country. On the demand side, as well, no variability is predicted. In other words, tastes and preferences for the consumption of specific goods should remain stagnant within and between countries. The conventional explanation of trade therefore predicts a specialisation of countries within specific industries that correspond best to the underlying relative factor endowments.

The literature on the theoretical and empirical shortcomings of the HO-theorem departs from various starting points. In example, Jones (2008) and others have criticised that the theorem’s basic assumptions are not defined precise enough. They highlight this in the circumstance that, at times, the same commodity is being regarded as capital-intensive within a capital-abundant country while labour-intensive in a labour-abundant country. This dichotomy has been referred to as “factor intensity reversal” (Jones, 2008: 4). The challenge by Subasat (2003) is even stronger as he denies any superiority of the HO-model in comparison to the classical trade model. He posits that the presumptions laid by the neoclassical trade model are backed by weak and empiricist studies. Moreover, he takes note of the so-called Cambridge critique which challenges the homogeneity assumption for the factor capital as being too simplistic as capital can appear in many different forms (e.g. Subasat, 2003: 156).

Besides this, the tremendous amount of case studies that depict trade relations which are inconsistent with the HO-assumptions support the thesis of an increasingly complex global trade system (e.g. Schott, 2000; Baldwin, 2008). Some of the developments are the increase of North-North and South-South trade or the transformation of previously labour-intensive goods to capital-intensive ones, especially notable in the food processing industry. Yet, this does not nullify all the assumptions put forward by the neoclassical model. Rather, it accentuates the necessity to continuously look out for alternative explanations which help to better comprehend emerging trade puzzles. Intra-industry trade is only one of these alternatives.

2.2. The emergence of alternative theories that incorporate intra-industry trade

After reviewing the trade patterns that the HO-theorem fails to capture, alternative theories are now being discussed.

Intra-industry trade between countries with similarly high per capita incomes: The first concepts of intra-industry trade

One body of literature that discusses the deviations from the HO-model emerged is the work on intra-industry trade between structurally similar countries. Here, in particular, Gruble and Lloyd (1975), Krugman (1981), Greenaway and Milner (1986) and Davis (1995) have helped to advance explanations that can describe the exchange of goods between countries with similar factor endowments. However, prior to these contributions, various scholars have already begun to talk about the presence of intra-industry patterns without directly referring to them as such (e.g. Frankel, 1943; Hilgerdt, 1945).

Gruble and Lloyd’s (1975) contribution is widely perceived as a first cornerstone when it comes to the measurement of intra-industry trade. Many subsequent studies have made use of the Gruble-Lloyd index to quantify the share of intra-industry trade in relation to the total amount of bilateral trade. Though, comprehensive theoretical models that scrutinised the origins of intra-industry trade only started to evolve afterwards.

In example, Krugman’s (1981) model suggests that the more alike the factor intensities of two countries are, the more they are expected to trade. This is because existing economies of scale will induce industry specialisation towards differentiated products in terms of quality (Krugman, 1981: 960). According to Krugman, it is complemented by a preference for a variety of products as the demand side is characterised by imperfect substitutes (Krugman, 1981: 962). It is precisely this demand-centred interpretation that marks the difference to the HO-analysis of relative factor endowments.

Other early concepts of intra-industry trade as well argue along the lines of scale economies and imperfect competition. Among them, the Dixit-Stiglitz-Krugman model, initially developed in the 1970s, is being regarded as the standard model of intra-industry trade (Lloyd & Lee, 2002: 3). Essentially, Dixit and Stiglitz (1977) posit that the “desirability of variety” (Dixit & Stiglitz, 1977: 297) of individuals translates into welfare gains when countries expand their range of different product qualities through intra-industry trade. Hence, countries that share similar demand structures due to similar levels of per capita income, i.e. OECD countries, are expected to generally benefit from involving in intra-industry trade.

Intra-industry trade between countries with dissimilar per capita incomes: The different perspectives on North-South intra-industry trade

This section presents the existing literature on North-South intra-industry trade, i.e. the trade of similar products between countries with dissimilar factor intensities and per capita incomes.

To start with, it is worth mentioning that the research on potential intra-industry trade patterns between developed and developing countries only commenced after the shortcomings of the HO-theorem had been substantiated by alternative trade theories. Yet, the theoretical work within this research field has been scarce despite the fact that “North-South intra-industry trade is an empirical reality” (Gilbert et al., 2014: 2).

Helpman and Krugman (1985), as for instance, suggest in their model that North-South intra-industry trade depends on the relative factor endowments and the economic size of the two trading nations. This finding is of high significance for the acknowledgement that intra-industry trade is not an exclusive phenomenon in OECD countries. Likewise, Falvey (1981) and Falvey and Kierzkowski (1987) have identified further intra-industry trade features between high-income and low-income countries. Hence, intra-industry trade was facilitated when either the restrictions on trade were low (Falvey, 1981: 505) or when the nature of trade between the Northern country and the Southern country was due to vertical product differentiation (Falvey & Kierzkowski, 1987: 158). In other words, the traded goods differed in their characteristics but not in their quality.

Clark and Stanley (1999) later re-emphasise the importance of vertical product differentiation for the manifestation of North-South intra-industry trade as it supports a demand-side oriented interpretation. Thus, positioning vertical product differentiation as the central determinant for North-South intra-industry trade follows the line of argument made by Flam and Helpman (1987). In their view, consumers with dissimilar incomes demand different qualities of products (Flam & Helpman, 1987: 821). However, unlike a “desirability for variety” due to deliberate preference choices for different varieties of the same product, in this case, the demand for different qualities is rooted in the limitations that follow from less disposable income for the majority of people living in developing countries.

The literature divides the causes of North-South intra-industry trade into country-level determinants (e.g. economic size, income distribution, relative factor endowments, trade restrictions) and industry-level determinants (e.g. vertical product differentiation). Next to this distinction, various studies have incorporated a range of other variables into the analytical framework of North-South intra-industry trade. In example, Tharakan (1984) points at the influence of trade protection, Culem and Lundberg (1986) at the product group of the traded goods and Stone and Lee (1995) investigate that there are crucial intra-industry trade differences between manufacturing and non-manufacturing countries.

2.3. Recent expansions of North-South intra-industry trade models

At this point, a review of recent studies on North-South intra-industry trade is conducted. Due to the formal constraints of this paper, however, only a selection of current contributions can be covered. They are vital as they hint at possible venues future research within this field might be moving towards.

In the current discussions on the determinants of intra-industry trade the literature has, in particular, pointed out the relevance of FDI in developing countries (e.g. Fukao et al., 2003; Xing, 2007; Onogwu, 2014). The underlying reasoning is that multinational corporations facilitate intra-industry trade between developed and developing countries in the moment when their value chains are expanded over a single industry.

Another emerging literature strand is the study of intra-industry trade from a political economy perspective (e.g. Madeira, 2013; Thies & Peterson, 2015). At the core, this attempt deals with issues relating to the power implications that multilateral trade agreements and protectionist motives have on the global architecture of trade. Since North-South trade relations are naturally concerned with unequal power relations between the trading partners, an increase in political economy contributions can only benefit the research of these dynamics. Moreover, they contribute to scrutinise how potential gains from trade are distributed between and within the trading countries.

3. Objectives and Methodology

The objective of this paper is to find out whether and how recent North-South trade has been experiencing a development of intra-industry trade patterns besides the well-studied inter-industry type of trade. For this purpose, the case of one of the two major African trading partners of the EU, i.e. Nigeria, is being assessed in more detail.

The analysis is conducted from a Nigerian perspective as this allows for a better account of the unequal and often detrimental conditions developing countries face within the context of North-South trade. On the contrary, it would have exceeded the scope of this paper if the analysis would have focused on the more comprehensive and diverse trade profile of a Northern country, especially that of Germany.

The applied methodology is a case study approach that combines a descriptive evaluation of Nigeria’s overall and intra-industry trade flows with a political economy interpretation of Euro-African trade agreements. Due to the limited availability of adequate data on North-South intra-industry trade, various sources have been combined and adjusted in order to be able to extract disaggregated bilateral trade flows between Germany and Nigeria.

4. Case Study: Nigeria’s trade with the “North”

4.1. Nigeria’s foreign trade profile

Before entering the core analysis of this paper – i.e. an investigation of the North-South trade patterns of Nigeria with a specific focus on how recent intra-industry trade structures emerged with Germany – a review of the overall foreign trade profile of Nigeria with its main trading partners is provided.

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Title
Changing trends in North-South trade contexts? An assessment of the intra-industry trade patterns between Germany and Nigeria
College
School of Oriental and African Studies, University of London  (Department of Economics)
Grade
1,0
Author
Year
2016
Pages
35
Catalog Number
V420452
ISBN (eBook)
9783668690608
ISBN (Book)
9783668690615
File size
1317 KB
Language
English
Series
Aus der Reihe: e-fellows.net stipendiaten-wissen
Tags
North-South Trade, Intra-Industry Trade, Heckscher Ohlin, Euro-African Trade
Quote paper
Kareem Bayo (Author), 2016, Changing trends in North-South trade contexts? An assessment of the intra-industry trade patterns between Germany and Nigeria, Munich, GRIN Verlag, https://www.grin.com/document/420452

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