Page 90 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes from trade liberalization would raise the quantity of intra-industry trade, but it’s proportion measured
by the Grubel-Lloyd Index would remain the same. Suppose that trade liberalization doubled both
imports and exports within a particular industry.
Table 3 : The dynamics of the GL Index

Category X i M i |X – M | (X + M ) GL Index
i
i
i
i
Pre-Liberalization 200 100 100 300 0.667
Pre-Trade Barrier 200 100 100 300 0.667
Post-Liberalization 400 200 200 600 0.667
Post-Trade Barrier 100 100 0 200 1.00

We can see from Table 3 that the net trade-gross trade ratio is multiplied and divided by the same
scalar, two in this case, the value of the net trade-gross trade ratio, and hence the Grubel-Lloyd Index,
remains the same :
2X i − 2M i 2X i − M i X i − M i
(2X i + 2M ) i = ( 2X i + M ) i = (X i + M ) i . ... (8)

Also in Table 3, we see the possible effect of some trade barrier imposed. The exports of one country
are decreased, and thus the quantity of intra-industry trade has fallen, yet this decrease in exports
has put the two countries in perfect trade balance in this industry. The Grubel-Lloyd Index has actually
risen from 0.667 to 1.00 even though intra-industry trade has decreased. This does not mean the
Grubel-Lloyd Index is of no use when comparing trade over time, we must simply be cautious when
interpreting change in the index.
Changes in intra-industry trade over time have significant effects on adjustment costs resulting from
that change in trade—adjustment costs that have no doubt been taking place in recent years from the
implementation of the FTA, NAFTA, and EU. In the first work on empirical intra-industry trade,
Balassa (1966) noted that due to the presence of intra-industry trade, difficulties of adjustment have
been overstated. Of particular importance to Canadian trade, if the FTA and/or the NAFTA brought
about adjustment within the motor vehicle industry—manufacturing a different type of motor vehicle
or switching to parts manufacturing—these adjustment costs would be much less than adjustment
from the motor vehicle industry to another industry, such as textiles. Manufacturing a different type
of motor vehicle, whether it be different on the quality or variety spectrum, would most likely entail
similar production methods and employment practices such that any adjustment process would not
be difficult. In fact, this is an adjustment that occurs quite regularly with the introduction of new
automobile models. Even a switch from automotive manufacturing to automotive parts manufacturing
would benefit from previous industry knowledge; automobile and automotive parts manufacturers
would necessarily have knowledge of each others’ markets since one supplies the other with an
intermediate good(s). Production methods, as well as employment practices, would undergo much
more change than the previous example, but not as much as a switch to the textile industry.
Due to the concern of measuring adjustment costs due to trade liberalization and because of the
dynamic problem of the Grubel-Lloyd Index, a variant of the Grubel-Lloyd Index, called the Marginal
Intra-Industry Trade Index, was developed by Hamilton and Kniest (1991) :

 X − X t—n
t
 M − M for M − M t n > X − X t n > 0
−
−
t
t
 t t—n
 M − M
M I I T =  t t—n for X − X t n > M − M t n > 0 ... (9)
−
−
t
t
 X − X t—n
t
 undefined for X < X orM < M
−
−
 t t n t t n

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