How Important is Intra-Industry Trade in Australia's Rapid Trade Growth?

Empirical work on intra-industry trade (IIT) is almost 30 years old. Initial research sought to identify if IIT was a significant share of total trade (TT). The Grubel-Lloyd (GL) index was widely used for this purpose, since it provides a relatively reliable measure of the importance of IIT at any point in time. Interest has since shifted to the changing importance of IIT over time, particularly with the emergence of regional trading blocks. Previous researchers have used movements in the GL index to infer the importance of IIT over time. This is not only vague, but can be misleading. In this paper, we show how to measure the contributions of net trade (NT) and IIT to the growth in TT. To understand changes in IIT over time, we also derive the contributions of imports and exports to the growth in TT, NT and IIT. All our formulas are illustrated with data for 205 Australian manufacturing industries defined at the 3- and 4-digit level of the SITC for the periods 1981 to 1986 and 1986 to 1991. The results show that while almost all the growth in TT was driven by NT between 1981 and 1986, IIT contributes almost half the sharp growth in TT between 1986 and 1991. The dominant contribution of NT between 1981 and 1986 was mainly a result of import growth, while the increase in the contribution of IIT between 1986 and 1991 was almost solely due to export growth.