The Pattern and Determinants of Intra-Industry Trade in Australian Manufacturing

This paper presents the pattern and determinants of intra-industry trade (IIT) in Australian manufacturing since the late 1970s. The results point to a sharp rise in IIT from the mid 1980s which appears to be linked with an outward-oriented policy. Industry-level analysis indicates that industries which experienced a sharp fall in protection are the industries with the higher levels of IIT. These include textiles, garments, rubber products, and machinery and equipment. An increasing trend in IIT suggests that the short-term adjustment costs associated with trade liberalisation are likely to be lower, and that liberalisation can proceed without huge short-term adjustment costs. Using a logit model the determinants of IIT are investigated. Results indicate that IIT is positively related to product differentiation and scale economies, and negatively related to the levels of protection and foreign ownership in the pre-liberalisation period. In the post-liberalisation period, however, scale economies explain the inter-industry variations in IIT. R&D intensity and close economic integration appear to have no impact on IIT regardless of the nature of the policy regime.