Marginal Intra-Industry Trade: Towards a Measure of Non-Disruptive Trade Expansion

When Verdoorn (1960) found that the formation of a customs union among the Benelux countries had stimulated large two-way trade flows of similar products, and Drèze (1961) discovered the same phenomenon in the fledgling six-nation EEC, economists took note because of one main reason: adjustment costs. Instead of inter-sectoral specialisation according to countries’ comparative advantage, the national economies seemed to preserve their broad industrial structures and to specialise predominantly at the intra-sectoral level. A “smooth adjustment hypothesis” (SAH) soon became firmly rooted in economic thinking, according to which intra-industry trade (IIT) expansion generally entails lower adjustment costs than inter-industry trade.

in Peter J. Lloyd and Hyun-Hoon Lee (eds.) Frontiers of Research on Intra-Industry Trade, Palgrave Macmillan, 2002. See paper