How important is the processed food in intra‐industry trade? The Australian experience

Abstract

Most studies of intra‐industry trade (IIT) in manufacturing exclude the processed food sub‐sector (standard international trade classification (SITC) subgroups 0‐1) from their analysis on the grounds that trade in this category is predominantly determined by the availability of natural resources in the country in question. However, this can produce misleading results, because the processed food industry is also subject to scale economies and product differentiation that determine IIT. Econometric investigations support most theoretical hypotheses, especially when the model of IIT is tested using the broad manufacturing data that include both the manufacturing commodity (SITC subgroups 5‐8) and processed food (SITC subgroups 0‐1). Results suggest that product differentiation and scale economies contribute positively to IIT, while trade protection discourages IIT.

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