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Share of Horizontal Intra-Industry Trade (HIIT) and Vertical Intra-Industry Trade (VIIT) in India's Intra-Industry Trade (IIT): An Empirical Study.

Intra-Industry Trade (IIT) is the export and the import of goods belonging to the same industry. For example in India the exports and imports of cars, both belong to the automobile industry. IIT indicates to the two-way flow of goods hence it is also referred to as two-way trade. It was Verdoorn in 1960's who discovered two-way trade while analyzing the trade patterns of the Benelux region. A detailed work explaining IIT was put across by Grubel and Lloyd in 1975. And thereafter numerous researchers world over analyzed and accepted the presence of IIT but to varying degrees. Greenaway, Hine and Milner (1995) disentangled IIT into horizontal IIT (HIIT) and vertical IIT (VIIT), where the former refers to the two way trade in goods having different varieties but similar in quality and the latter to goods having different varieties but they also vary in quality. HIIT falls in the remit of modern theories and VIIT to the traditional theories of Comparative Advantage. This distinction into HIIT is done on the basis of models by Dixit and Stiglitz (1977) and Lancaster (1979). Whereas into VIIT on the basis of models by Falvey (1981), Falvey and Kierzkowski (1985) and Shaked and Sutton (1984). The methodology used for disentangling IIT into HIIT and VIIT is Unit Values based. The analysis is conducted for UK trade at the 5-digit SITC using unadjusted Grubel-Lloyd Index for IIT and UV method for disentangling into HIIT and VIIT. The results obtained found VIIT to be the more important than HIIT. Bhattacharyya (2002) analyzed IIT of 18 Asian and Latin American less developed countries. The Grubel and Lloyd Uncorrected Index 1975 is used to calculate IIT and the Greenaway et al 1995 methodology along with its modification as suggested by the present paper is applied. The modification is suggested as dividing the industries engaging in HIIT and VIIT leaves an unequal number of industries in both the categories and thus the results are biased. Thus the modification has the attribute that the value increases or decreases as a proportion of trade accounted for the particular category. The results indicated to relatively high IIT for manufactured goods and machine and transport equipment, VIIT dominates HIIT and economic development emerges as a determining factor in two-way trade. Sharma (2002) analyzed Australian trade in the post-liberalization period of 1988/89 and 1998/99 to determine IIT, HIIT, VIIT, and its determinants. The Grubel and Lloyd Uncorrected Index and Greenaway et al methodologies are used to attain the results at the 5-digit SITC. The share of IIT in the two comparative years undertaken in the study point to increased IIT from 27 to 60 per cent. VIIT is found to dominate HIIT in Australiantwo-way trade. It is also found that the determinants of HIIT and VIIT differ. HIIT is positively related to scale economies but negatively to Research and Development.

Thus the aim of the present study is to analyze IIT of India and the World and to dichotomize IIT into HIIT and VIIT to depict the trade pattern on the basis of product quality.

Data and Methodology

The secondary data is used to conduct the analyses. The data is extracted from World Integrated Trade Solutions (WITS) official website. The methodology adopted to observe the level of IIT is the uncorrected Grubel and Lloyd Index (1975):

GLi = (Xi+Mi) - [absolute value of Xi - Mi]/(Xi+Mi) * 100

Where GLi is the Grubel and Lloyd Index for industry i. X and M are the exports and imports. The value of this index varies between 0 and 100. At 0 all trade is inter-industry trade and at 100 all trade is Intra-Industry Trade. Weighted Grubel-Lloyd Index involves multiplying the GLi with the weights at each industry level to get an aggregated value for an industry as a whole or at the level of the nation. Weighted Grubel-Lloyd Index is:

WeightedGli = Gli * (Xi+Mi)/[summation](X+M) * 100

As for the dichotomization of IIT into HIIT and VIIT, Greenaway et al (1995) methodology based on the Unit Values (UV) of exports (UVx) and imports (UVm) is used. This is analyzed at the 15 per cent limit. If the UV of export relative to import is within 15 per cent, then the industry is said to horizontally differentiate otherwise it is classified as vertical. UV is classified as horizontal if:

1 - [infinity][less than or equal to]UVx/UVm [less than or equal to] 1+[infinity]

UV is classified as vertical if:

1 - [infinity] > UVx/UVm

Or

1 - [infinity] < UVx/UVm

Where [infinity] = 15%. Firstly all industries in which either exports

or imports is zero are eliminated. Then, the industries on the basis of UV are classified into horizontal or vertical category. In each category thereafter average IIT is calculated. But Bhattacharyya (2002) pointed that the Greenaway et al method does not give unbiased results as, for example, if HIIT category has a few number of industries and VIIT has a larger number of industries, then average IIT will not depict the true picture. Therefore Bhattacharyya (2002) put across the modified method which is:

NIITver = (Mver + Xve/Mtot + Xtot) * GL(U)ver Mtot + Xtot

NIIThor = (Mhor + Xhor/Mtot + Xtot) * GL(U)hor

Where [NIIT.sub.ver] is the Bhattacharyya modified Index for calculating VIIT in vertically differentiated industries and [NIIT.sub.hor] in horizontally differentiated industries. [M.sub.ver] and [X.sub.ver] are the imports and exports in vertically differentiated industries. Similarly [M.sub.hor] and [X.sub.hor] in horizontally differentiated industries. And [M.sub.tot] and [X.sub.tot] are:

Mtot = Mver + Mhor

Xtot = Xver + Xhor

Thus the advantage of using this index is that the values increases or decreases as the proportion of trade accounted for by the particular category (horizontal or vertical) increases or decreases.

Results and Discussion

In Table 1 the number of industries in which India engages in trade with the World is mentioned. This was observed at the 4-digit Harmonized System of Coding (HS) during 2016. The findings are:

(i) The 4-digit HS coding is classified into 1224 industries in total.

(ii) India engages in exports in 1213 industries to the World.

(iii) India imports in 1184 industries from the World.

Thus, India is found to be trading in a large number of industries with the World although it exports in a larger number of industries than it imports, nevertheless both the numbers are quite significant. This indicates that the liberalization in trade in 1991 has been quite fruitful.

Level of IIT

In Table 2 the observed level of IIT is depicted along with the number of industries in which two-way trade took place during 2016. The observations are:

(i) India engages with the World in both exports and imports in 1178 industries.

(ii) The Grubel-Lloyd un-weighted and weighted index gives similar results at 41.1005 and 40.339 respectively.

(iii) Thus roughly about 40 per cent of India's trade is two-way.

The findings reveal that India engages in two-way trade in a large number of Industries with the World and although nearly 40 per cent of India's trade is two-way but still one-way trade is also quite significant and dominant in India's case.

Number of Industries in which Unit Values are attained

In Table 3 the Number of Industries in which the Unit Values of exports and imports are attained during 2016 is discussed. These are:

(i) Unit Values of exports are available in 1035 industries at the 4-digit level during 2016.

(ii) Unit Values of imports are available for 1008 industries at the 4-digit level during 2016.

(iii) Both export and import Unit Values are attained for 1000 industries at the 4-digit level during 2016.

Thus the Unit Values for both exports and imports are available for 1000 industries during 2016 and hence analysis would be conducted for these 1000 industries while dichotomizing IIT intohorizontal IIT and vertical IIT.

Industries classified into the Horizontal and Vertical IIT category

In Table 4 the 1000 industries (Table 3) for which the Unit Values of both exports and imports were attained have been classified into the category of horizontally differentiated and vertically differentiated. The observations registered are:

(i) In 167 industries India engages in horizontal IIT during 2016 with the World.

(ii) In 833 industries India engages in vertical IIT during 2016 with the World.

Overall, India engages in vertical IIT in many more number of Industries during 2016. This implies that a larger share of India's two-way trade is based on differences in quality.

Horizontal IIT and Vertical IIT

Table 5 incorporates the results of Horizontal IIT and Vertical IIT during 2016 at the 4-digit HS coding. The Grubel-Lloyd Uncorrected Index results are also mentioned alongside the Bhattacharyya 2002 correction. The following observations were made:

(i) The Bhattacharyya 2002 correction finds VIIT to be more significant at 33.305 and HIIT at 6.3005.

Thus the NIIT points to VIIT at 33.305 having a larger share of total IIT than HIIT at 6.3005. India's two-way trade is dominated by exchanges in products with different quality.

Division of Vertical IIT industries

In Table 6, the VIIT industries are further divided into two, firstly those in which price of exports is greater than the price of imports and secondly those in which price of exports are lesser than the price of imports. Thus the implications are:

(i) Of the 833 industries classified as vertically differentiated, in 349 industries export prices are greater than the import prices. Thus in these industries, India exchanges costlier products for cheaper ones from the World.

(ii) In 534 vertically differentiated industries, the export prices are lesser than the import prices. Thus in these industries, India exchanges cheaper products for the costlier products it buys from the World.

Overall, India in a larger number of the vertically differentiated industries exports cheaper products for the dearer imports from the other nations in the World.

Findings

The main findings are as follows:

(i) At the 4-digit HS Coding the total number of industries is 1224, of which India exports in 1213 industries and imports in 1184 industries.

(ii) India's 40 per cent of total trade is two-way trade and this takes place in 1178 industries.Unit Values are attained for 1000 industries, of which 167 industries are classified as engaging in horizontal IIT and 833 in vertical. Thus India engages is more rigorous two-way trade in industries based on quality differences.

(iii) Of the total two-way trade, 33.305 is classified as vertical and 6.3005 as horizontal. Thus vertical IIT is not only in a larger number of industries but also forms a very significant share of total two-way trade.Of the 833 vertically differentiated industries, India exports cheaper goods in exchange for costlier goods in 534 industries. Whereas, it exports costlier goods for the imports of cheaper goods in 349 industries. Thus in a larger number of industries India exchanges cheaper goods for the dearer ones.

Conclusion

Indian Economy's two-way trade is around forty per cent of India's total trade in 2016. Moreover, of the 40 percent of IIT, a much greater share is of vertical IIT at 33.05 in comparison to the 6.3005 of horizontally differentiated trade. Thus, India is largely engaged in two-way trade based on differences in quality as well as price.

References

Balassa, Bela (1966): "Tariff Reductions and Trade in Manufacturers among the Industrial Countries", The American Economic Review, Vol. 56, No. 3, pp. 466-473.

Bhattacharyya, Ranajoy (2002): "Vertical and Horizontal Intra Industry Trade in Some Asian and Latin American Less Developed Countries", Journal of Economic Integration, Vol. 17, No. 2, pp. 273-296.

Greenaway, David, Robert Hine and Chris Milner (1995): "Vertical and Horizontal Intra-Industry Trade: A Cross Industry Analysis for the United Kingdom", The Economic Journal, Vol. 105, No. 433, pp. 1505-1518.

Grubel, H G and P J Lloyd (1975): "Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products", London: Macmillan.

Sharma, Kishor (2002): "Horizontal and vertical intra-industry trade in Australian manufacturing: does trade liberalization have any impact?", Applied Economics, 36:15, 1723-1730.

Verdoorn, P J (1960): "International Investment and International Trade in the Product Cycle", Quarterly Journal of Economics, pp. 190-207.

WITS 1992 to 2015: World Integrated Trade Solution Database, available at wits.worldbank.org.
Table 1: Number of Industries in which India engaged in
Exports and Imports at the 4-digit HS Coding during 2016

Total Number of Industries at the    1224
4-digit HS Classification

Exports                              1213

Imports                              1184

Note: As per the data available on World Integrated Trade
Solutions (WITS), data accessed in May 2017.

Table 2: Number of Industries and the level of IIT at the 4-digit
HS Coding during 2016

Number of Industries in    [GL.sub.unweighted]   [GL.sub.weighted]
which IIT attained

1178                       41.1005               40.339

Note: Calculations as per the data available on World Integrated
Trade Solutions (WITS), data accessed in May 2017.

Table 3: Number of Industries in which Unit Values attained
at the 4-digit HS Coding during 2016

             Exports       Unit Values   Imports       Unit Values
             quantity      of Exports    quantity      of Imports
             unavailable   attained      unavailable   attained

Number of    178           1035          176           1008
Industries

             Unit Values for
             both Exports
             and Imports
             attained

Number of    1000
Industries

Note: As per the data available on World Integrated Trade
Solutions (WITS), data accessed in May 2017.

Table 4: Number of Industries dichotomized into horizontally
and Vertically Differentiated at the4-digit HS Coding
during 2016.

                  Unit Values of     Number of industries
                  both Exports and   Horizontally
                  Imports attained   differentiated

Number of         1000               167

                  Number of
                  Industries Vertically
                  differentiated

Number of         833
Industries

Note: As per the data available on World Integrated Trade
Solutions (WITS), data accessed in May 2017.

Table 5: Level of Horizontal IIT and Vertical IIT at the
4-digit HS Coding during 2016

NIIT
HIIT           VIIT
6.3005         33.305

Note: Calculations as per the data available on World
Integrated Trade Solutions (WITS), data accessed in May
2017.

Table 6: Division of Industries with Vertical IIT into those
having higher export prices than imports prices and lower
export prices than imports prices during 2016 as per
4-digit HS Coding at 15% level

          [P.sub.exports] >    [P.sub.exports] >    Total Number of
          [P.sub.imports]      [P.sub.imports]      Industries

India     349                  534                  833

Note: Calculations as per the data available on World
Integrated Trade Solutions (WITS), data accessed in May
2017.
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Author:Kular, Simran Kaur
Publication:Political Economy Journal of India
Geographic Code:9INDI
Date:Jul 1, 2018
Words:2388
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