Page 86 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Trade Analysis Project's (GTAP) Version 6 Database (Dimaranan 2006) to compute extent of such
trade. GTAP is a Computable General Equilibrium (CGE) trade model with large database suitable
for policy analysis (Hertel ed. 1997). (26) This model divides the world economy into several countries
and composite regions. The model and database are widely used for analyzing the effects of issues
such as trade liberalization and technological changes. The original Version 6 database consists of 57
commodities and 87 regions expressed in U.S. billion dollars. Typically, the database comprises bilateral
trade flows between all the regions. Each set of transactions is recorded at both market prices and
agent's prices. GTAP model belongs to the class of computable general equilibrium models (CGE)
based on the Australian ORANI model (Dixon et. al. 1982).
We retain the region and sector's identifier number so as to keep it convenient to refer to the GSC
classification by mentioning the numbers corresponding to the large database. Typically, there are
two concordances of GSC2, one with the Commodity Product Classification (CPC) and the other one
with the ISIC Revision 3 (UN). (27) In our empirical analysis, from Table 2 it is seen that the share of
IIT in total trade is not a negligible percentage for the developing countries at more advanced level of
development. Compared to the developed economies, the share is, no doubt, small. But the interesting
picture that comes out from our analysis is that the share is substantial as they diversify their production
structure to hi-tech goods especially, with the advent of information and communications technology.
Manufactures exports were the developing countries most dynamic part of export sectors in the
1970s and 1980s and also in recent decade. With the rapid growth and economic development of the
East Asian newly industrializing countries (NICs), Latin American NICs and the South and South
East Asian Countries, there has been a significant increase in intra-industry trade (IIT) in the developing
economies. A substantial proportion of these countries IIT has been with their major trading partners
e.g., the United States, Japan, the EEC, the U.K., i.e. the developed world. The figures for intra-trade
suggest that any presumption that LDCs are more likely to have a comparative disadvantage in
advanced manufactures relative to industrial countries and advantage relative to developing countries
less developed than them is too simple. Some commodities are too widely produced (e.g., clothing,
steel, machinery and transport equipment, etc.) to offer scope for such intra-trade. Countries' whole
trading patterns are developing although there has been little change in the composition of
manufactured goods' imports. The Asian countries are no longer net importers of manufactures, and
in Latin America the ratio of exports to imports is approaching a half. It is clear that the diversification
into manufactures, and then into different sectors, has gone well beyond early stages of
industrialization or exporting for the major exporters. Table 3 shows commodity-wise patterns of
comparative advantage as revealed through their direction and composition of global trade. The
'stylized' picture that comes out from the empirical analysis is that the considerable two way trade of
developing economies with the developed economies and also with the world can be explained by
the level of development, market size, share of manufacturing value added in GDP and/or share of
manufacturing exports in total exports and some trade orientation variable measuring, as a proxy,
trade policy intervention. These are all country features. The specific products which have the highest
levels of IIT are organic chemicals, glass, leather, iron and steel forms, textile yarn, fabrics, in addition
to various types of machinery and equipment including vehicles. Goods with high IIT are more
'sophisticated' and these are, mostly, capital intensive and/or investment goods. Changes in the
specialization of certain manufactures towards intra-industry production and exchange is a reflection
of the growing similarities between the developing economies and the developed counterpart in
terms of relative factor endowments, consumers' preference structure, level of development. It may
be reasonably expected that the LDCs will continue to evolve up the ladder of comparative advantage
and specialize through international division of labour.
As the developing economies diversify their export through increased IIT, the DCs will have
opportunities to export to these countries the products of the industries e.g., textiles, leather, etc.
This, however, depends on the LDCs ability to identify and adopt new technologies for achieving
such competitiveness. Here, the "vertical specialization" and fragmentation of production processes
become important. This means that quality differentiation rather than attribute differentiation is the

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