Intra-Industry Trade and the C-H-O Model: Evidence and Implications for Adjustments

By the late 1980s many of the basic issues relating to modelling the determinants of intra-industry trade appeared to be resolved. There was a core theoretical foundation which offered a widely accepted explanation for intra-industry specialization and two-way trade in horizontally differentiated goods. In its single-sector form (Krugman, 1979) it offered a pure non-H—O explanation of such specialization and exchange between identical economies, based upon individuals’ preference for variety and the existence of decreasing costs in production. The subsequent incorporation of both H—O and non-H—O sources of trade into a general equilibrium framework (Helpman, 1981; Helpman and Krugman, 1985) allowed for inter-industry specialization in homogenous goods and intra-industry specialisation in horizontally differentiated goods, and is often referred to as the Chamberlin—Heckscher—Ohlin (C—H—O) model. Thus a theoretical coherence was provided for the contrast between ‘new’ and ‘old’ (factor endowment) explanations of trade. Interest was also generated in the opportunities created by this ‘new’ type of model for affecting the pattern of comparative advantage through the strategic use of trade and industrial policies.