trade in a particular sector is based on scale economies and/or market structure.<sup>21</sup> By engaging in IIT, a country can reduce the number of similar goods it produces and benefit from scale economies. Higher IIT ratios suggest that these sources of gains are being exploited. The IIT index measures the degree of overlap between imports and exports in the same commodity category, with a value of 1 indicating pure intra-industry trade and a value of 0 indicating pure inter-industry trade.<sup>22</sup>

|**Tabl**<br>|**e 3: Trade Comp**<br>|**lementar**<br>|**ity Index **<br>|**(TCI) at 6-digit H**<br>|**S**<br>|
|---|---|---|---|---|---|
|**Reporter**<br>**(Exporter)**|**Partner**<br>**(Importer)**|**TCI**|**(%)**|**Number of Com**<br>**Prod**|**monly Traded**<br>**ucts**|
|||(2002)|(2007)|(2002)|(2007)|
|Bangladesh|India|42.0|39.3|1,057|1,752|
|India|Bangladesh|27.1|32.2|4,256|4,270|

_Source_ : Calculated based on UN COMTRADE.

|**Table **|**4: Intra-Industry Trade (IIT) Index* in 2007: Common Set of **|**Products at 6**|**-digit HS**|
|---|---|---|---|
|**HS Code**|**Product**|**IIT India**|**IIT Bangladesh**|
|230220|Rice bran oil|0.935|0.836|
|721550|Bars and rods other than free-cutting steel not further worked<br>than cold formed/cold finished|0.923|0.421|
|850720|Other lead-acid accumulators|0.922|0.557|
|600622|Other knitted or crocheted fabrics of cotton, dyed|0.771|0.929|
|960719|Other slide fasteners|0.770|0.719|
|610510|Men‘s/boys‘ shirts of cotton|0.758|0.819|
|621790|Parts of garments/clothing accessories|0.729|0.463|
|848390|Parts of transmission shafts, cranks, bearing housings, gears or<br>clutch|0.703|0.778|
|854419|Winding wires of other metals/substances|0.505|0.633|
|620319|Suits of other textile materials|0.486|0.704|
|521211|Other unbleached woven fabrics of cotton weighing not more<br>than 200 g/m<sup>2</sup>|0.417|0.770|

*IIT index was calculated for bilateral trade between India and Bangladesh.

_Source_ : Calculations based on UN COMTRADE.

To identify the vertical IIT, the indices at a high disaggregated level (HS 6) are compared with those at a low disaggregated level (HS 2). IIT indices that are low at HS 6 and high at HS 2 are a necessary, although not sufficient, condition for the existence of vertical trade because they suggest that the countries trade different products in the same sector.<sup>23</sup> Examination of the common set of traded goods between

> 21 Horizontal IIT refers to the simultaneous exports and imports of goods classified in the same sector and at the same stage of processing, usually based on product differentiation. Vertical IIT refers to the simultaneous exports and imports of goods classified in the same sector but at different stages of processing, usually based on the ―fragmentation‖ of the production process into different stages, each performed at different locations and taking advantage of the local conditions. See, for example, Sodersten and Reed (1994).

> 22

> 23

> Before calculating IIT, data coordinates at HS nomenclature H2 were matched for both countries. The traditional way to measure the degree of intra-industry trade is the Grubel-Lloyd Index (G-L Index). For further details, refer to Mikic and Gilbert (2007, p. 76).

> The authors are grateful to the referee for asking to carry this particular comparison. However, the usual caveat is that there might be aggregation bias. When the IIT index is observed to be low at HS6 but high at HS2, one

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