The quality and pattern of intra-industry trade between the geographically proximate regions of Northern-Southern Ireland and Southern Ireland-Great Britain

This paper examines the quality and pattern of the intra-industry trade (IIT) between the geographically proximate regions of Ireland, as well as Southern Ireland and Great Britain in 1978 and 1992. Relative unit values are calculated to ascertain qualitative differences in the exports of the regions. The intensity of IIT is measured using the Grubel-Lloyd index. Changes in the pattern of trade, whether of the inter or intra-industry type, are also calculated. We find major qualitative improvements in the South's exports, and a strengthening of her comparative advantage with regional trading partners. I I N T R O D U C T I O N I nternational and inter-regional trade is of great importance in a small open economy such as the Republic of Ireland (South) and a region of a national economy such as Northern Ireland (North). Trade brings access to a larger market, allowing for gains from specialisation leading to an improved *We are grateful to the International Fund for Ireland (IFI) for financial support. The views expressed herein are those of the authors and do not necessarily reflect those of the organisations involved. We would like to thank two anonymous referees of this journal for valuable obser­ vations on earlier versions of this paper. Computational assistance from James Conaghan was invaluable, and comments made by Stephen Roper were helpful. consumption and production mix, as well as potential dynamic gains causing the expansion of production possibilities (see Myint, 1958; Krugman, 1979a and b). Studying the pattern of trade can reveal interesting information about an economy; given its production and consumption mix, it would indicate where the possibilities of trade expansion might be, as well as, what possible gains to the economy would accrue from the expansion of trade in terms of consumer prices and jobs. This paper will mainly be concerned with the type and quality of NorthSouth trade comparing and contrasting it with trade between the South and Great Britain (GB), another geographically closely located region. The trade between these areas can be viewed as inter-regional trade, because of the traditional economic links between these areas. This is all the more so in the context of increased integration within the European Union. From the view­ point of the South, the North and G B are traditionally its main export markets, although this importance has diminished over time. I n 1978 the North and G B accounted for nearly half of the South's total trade (6.1 and 42.3 per cent respectively). The corresponding figures for 1992 were 4.3 and 32 per cent. The potential for increased trade between Northern and Southern Ireland has aroused a great deal of interest in many quarters. This is particularly so because of the peace process currently underway in Northern Ireland and the close physical proximity of the regions within one island. The increases in trade could emanate from increases in agglomeration economies and improved infrastructure at a regional level as emphasised in Krugman (1991). The Confederation of Ir i sh Industry (CII , 1990) Newsletter of May 1990, spoke optimistically of creating some 75,000 extra jobs in both regions through a 50 per cent increase in manufactured goods trade between the two areas. Scott and O'Reilly (1992) conservatively revise this figure at 7,500 extra jobs. This paper will be concerned exclusively with intra-industry trade (IIT) , which is defined to exist when there is simultaneous export and import within the same product group. This type of trade is a large part of the trade between the regions we are concerned with. We shall be focusing on the broad pattern of I I T between these three regions of the Brit ish Isles. It should, however, be noted that we will be looking at bilateral trade between these regions and not the total trade of any country or region. The study of bilateral trade flows does not allow us to draw any overall conclusions about the industrial organisation and policy driving the total trade of a country or region. Nevertheless we are able to make some inter-regional (inter-country) comparisons. These include the measurement of the relative quality of exports within the same product group across the regions; as well as gauging changes in the pattern and intensity of I I T in this bilateral setting. We will be analysing trade data for 1978 and 1992. We do this for two reasons: 1978 is the last year of the Irish pound's post-independence parity with sterling, and 1992 is the most recent year for which data are available. Also, the gap between these two years is sufficiently long for changes i n the policy regime and other factors influencing the industrial landscape of the economies to filter through. For example, 1978 is prior to the major deindustrialising phase in the U K , and before many of the successes in attracting inward investment in the South worked their way through. Using data for I I T between North-South and South-GB 1 at a three digit level of disaggregation (some 250 products) we first calculate relative unit values for all three digit commodities subject to I I T in 1978 and 1992. This allows us to comment on the relative quality of goods simultaneously pro­ duced in these regions. Second, we construct indices to describe the intensity of I I T . This is interesting because a high intensity of I I T reflects similarities in factor endowments and per capita incomes between the economies concerned. Third, we utilise these indices of I I T to determine the pattern of the change in trade. This allows us to say, for broad commodity groups, whether the change in trade between 1978 and 1992 is of the inter-industry or I I T type. I f it is mainly the former then it is likely to mean greater adjustment costs to labour and capital within the economy, as these factors of production are required more often to shift to different occupations. The rest of the paper is organised as follows: Section I I sets the study of the pattern of trade into context and discusses the importance of intraindustry trade (IIT); Section I I I presents an overview of the quality of NorthSouth as well as South-GB I I T in 1978 and 1992; Section I V examines changes in the intensity of I I T including marginal I I T ; and finally, Section V contains a summary and some conclusions. I I P A T T E R N O F T R A D E AND I N T R A I N D U S T R Y T R A D E 2.1 Conceptual Basis for Intra-industry Trade International trade between nations prior to the Second World War was principally dominated by trade in different products. So, for example, Great Britain exported machinery to Ireland (South) in exchange for agricultural produce. This can be described as inter-industry trade and reflects different factor endowments and even differences in per capita incomes. The direction of post-war trade between industrialised countries, however, has increasingly taken the form of I I T involving the exchange of different varieties of the same product. By the late 1970s this type of trade accounted for around 60 per cent L Detailed data for the North's trade with GB are unavailable. of the value of all world trade (Greenaway and Milner, 1983). In summary, where countries have similar per capita incomes, factor endowments and market structure, we would a priori expect a good deal of I I T , as was sug­ gested originally in Helpman and Krugman (1985). Our priors, thus would be to find a good deal of I I T between the regions we are studying. There are two important reasons for analysing I I T between regions and neighbouring states. F irs t , one is able to obtain some information about the quality of similar goods exported by the countries or regions in question. Thus, in our case we will be able to say something about the relative quality of the South's exports vis-a-vis the North and G B . Second, changes in the intensity of I I T between two periods or marginal changes in I I T can reveal information about the type of adjustment taking place in an economy. By adjustment we refer to the link between the pattern of trade and the factors of production (labour and capital) engaged in their production. I f the growth in trade is of the I I T variety it implies less displacement of existing factors of production, as the expansion in trade is within the same industry (see Brulhart and McAleese, 1995 and references cited therein). The converse argument applies if the growth in trade is of the inter-industry variety. Thus, growth in intra-industry trade implies less costs to the economy, as fewer factors of production have to be (re)employed in new industries. 2.2 Measures of Intra-industry Trade The most widespread measure of intra-industry trade is the Grubel-Lloyd (1975) index. This relies on total imports and exports within a particular pro­ duct category using the S I T C (Standard International Trade Classification) definitions. As such the Grubel-Lloyd index is a measure of the intensity of I I T . I I T , within a product group and between two countries, is defined to exist whenever there is the simultaneous presence of both imports and exports: