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Term PaperIntra-Industry Trade and its determinants in case of Pakistan  Submitted By                                                                            Submitted To                                                                                                                    Muhammad Majid                                                            Ma’am Memona Sadaf# 17010032-005Ayesha Sadiqa # 17010032-006Program: MBA (P) 1.5University of Management and Technology SialkotIntroductionGlobalization leads to success in economics. One economy gets mutual benefits from another economy. Asian countries enjoy the benefits of western countries technology as well as west enjoys Asian commodities. This is the millennium of information that squeezed out the distance and time factors by fast means of communications and transport. This combination of economies and societies makes the flow of capital, commodities, ideas and people fast and easy. Trade liberalization is one of the major factors of the spread of globalization. Developed economies of the world are certainly benefited by globalization. The top beneficiaries of globalization are America and other leading nations of Europe.Globalization is at its maturity; it is not possible for any nation in world to produce fully all parts of a product for trade by itself so country desires goods from other country for its consumers. For attaining this function, trade happens between economies and industries who are making the same kind of products. This trade between economies of same commodities is known as Intra-industry trade (IIT). The top industrial countries import unrefined material from the arising countries and export semi-finished & finished commodities to them or trade between same kind of commodities.IIT share in the total trade among developed countries is quite significant and approximately it’s rising by 5 % annually. There are less evidences of IIT in trade relations between developed and developing countries but the inter-industry trade between countries are highly observed.  Some studies find the presence of IIT in trade between developing countries Willmore (1972).Many empirical studies have being paying attention on Intra-industry trade between leading economies.Intra-industry trade was first observed in the 1960s by Verdoorn (1960), Balassa (1966), the authors realized the revolution in economics, there was specialization within industries and two-way international trade. These authors became aware that certain developed countries exported and imported in the same product categories. This phenomenon occurred in the years following of European Economic Community (EEC). To promote the regional trade Pakistan adopted commercial policy. Like other developing economies Pakistan was also followed import-substitution policy for industrialization that was highly supported by high tariff rates, import quotas and overvaluation of exchange rate.Literature Review:International trade mostly explains by the Heckscher-Ohlin(HO) model, which predicts that countries exports commodities that uses its abundant factors intensively and import commodities that use less abundant factors intensively. According to HO model for similar products countries trade less compare to the products of different category. The IIT literature began in 1960s when Balassa (1966) analyzed the trade within the industries of customs union in Europe.The basic structure of horizontal IIT models is that products are not differentiated by the quality, but the similar features preferred by consumers. In vertical IIT models, the quality is directly related to the capital-labor ratio. A capital-rich country produces higher-quality products while a labor-rich country produce lower-quality products.Jambor (2014) used the data from 1999-2010 to analyze agri-food intra-industry trade (IIT) between New Member states (NMS) and EU-27,IIT share of EU-27 increased over the time and it seems NMS export low quality products to EU-27.The Author apply different models shows that similar factor endowment increase the trade of homogenous products as  well as quality-di?erentiated agri-food products. Economy size related in IIT, different size economies have higher share in both Horizontal Intra-industry Trade (HIIT) and Vertical Intra-industry trade (VIIT) than those similar economies. The article results also suggest that agri-food IIT with NMS has positive impact on HIIT and VIIT.Greenaway & C.Hine (1990) writes trade in Europe grew in 1960 and 1970 mostly in intra-industry, but in 1980 it become slower overall but the IIT become stable. Same time industries started becoming specialize in Inter-industry trade rather than IIT which arises adjusting problems between industries but this problem overcome and in 1992  creation of the single market could push this process further and eliminating tariffs and liberalization made this easier and possible.Linder (1961), the amount of two-sided trade increases if the demand structure is similar. Putting it in a different way, the Linder assumption states that nations with same demand structure will sell to other nations and trade in further horizontally differentiated commodities.Balassa (1986) has set out to explain inter-country differences in the extent of intra-industry trade in manufactured goods. For this purpose hypnotizes are being derived. Firstly it concluded with joint economies that with Intra-industry trade Economy develops and market size Increases with contributions from traders from agglomeration economies results openness of economies. Finally then economies divide into developed and developing country groups and conclude that Intra-industry trade is less costly because the adjustment cost between industry rather than inter-industry. Zhang and Clark (2009) investigate HIIT and VIIT for the case of United States. This study uses both industry and country–specific characteristics as explanatory variables. The study of Zhang and Clark (2009) show that HIIT will have relatively low factor adjustment costs when compared with the VIIT. The results have support for new trade theories and traditional factor endowment-based.Chang (2009) examines the main factors of HIIT and VIIT including investment approaches of a firm in the industry of information technology for Asian, European and US markets. The study uses time series data over the period of 1996-2005 for said variables in sample economies. The results indicate that vertical intra-industry trade is playing its significant role among Asian and European markets while horizontal intra-industry trade is significant between Asian and US.Leitão and Faustino (2009) also show that trade increases if the transportation costs decrease.From the above literature review we conclude that producers and consumers both get benefit from IIT. Manufacturer manufacture products at little economic efficiency and consumer also get high range of products at cheaper prices. There is no existence of empirical research that investigates causal relationship of IIT of Pakistan. This study will try to fill this gap and the research focuses on Pakistan’s IIT in agricultural and food commodities, analyzing time series from 2012-2016. Data collection and Objective:This paper is based on secondary data from the National Bureau of Statistics. The research focuses on Pakistan’s IIT in agricultural and food commodities, analyzing time series from 2012-2016MethodologyThe most common index used to measure the intra-industry trade is the Grubel-Lloyd (1975) index. To calculate the intra industry trade level (IIT) for an industry i will be:   GIITi=  ((Xi+Mi)-|Xi-Mi|)?((Xi+Mi)) *100Or, it can be written as: GLIITi=1-|Xi-Mi|?((Xi+Mi) ) *100Where GLIITi is the Grubel Lloyd index of intra-industry trade i, and represents the values of exports and imports in industry i. GL index can take values from 0 to 100. When the GLIT value is zero it indicates that there is no IIT (because exports or imports are zero). When the value is equal to zero, then all trade is IIT (exports equals’ imports).RESULTS AND DISCUSSIONSAnalyzing the trends in Pakistan’s foreign trade during the time period selected increased has been observed both in imports and exports. Exports increased with 17% and imports with 19% respectively the exports and imports of agri-products also increased in the specific time with 27% and 18% respectively, overall the trade balance remaining negative, negative trade balance is mainly because of high imports of manufactured items and energy and gas resources (Table 1).Agri-foods commodities of Pakistan share in the total exports of country is 18% Fortunately, their share increasing during the analyzed period with 7%, fact which affected the agri-food trade balance in good, while the country imports share is remain consistent at 6% as Pakistan itself is a agriculture country imports of agriculture is less over the time somehow it fluctuate with 2% in time but remain consistent, fact which affects the foreign trade turnover. . The average annual growth rate for agri-food exports is 9%, while for agri-food imports reached 13% (Table 1).Table 1. Value and share of Moldova’s external trade and agri-food trade flows, 2001-2015 (selected years) 2005 2007 2009 2011 2013 2015 Average Growth rateExports (Thousand RUPEES) 984840562 1196637579 1617457614 2110605451 2583463177 2397692965 0.17Imports (Thousand RUPEES) 1711158363 2512071666 2910975267 4009093041 4630520793 4644151648 0.19Agri-food exports (Thousand RUPEES) 113759756 170920112 272241278 356595988 464915599 448651361 0.27Agri-food imports(Thousand RUPEES) 103890157 121756597 141005728 179555550 221052879 280008343 0.18Trade Balance(Thousand RUPEES) -72631780 -1315434087 -1293517653 -1898487590 -2047057616 -2246458683 XAgri-food Trade balance(Thousand RUPEES) 9869599 49163515 131235550 177040438 243862720 168643018 XShare of Agri-Food exports, % 11.5% 14.2% 16.8% 16.8% 17.9% 18.7% XShare of Agri-Food imports, % 6.07% 4.8% 4.8% 4.4% 4.7% 6% XSource: own calculations based on data from the National Bureau of Statistics Summarizing the evolution of agri-food trade flows, there is an increasing trend is noticed in agri-food exports from 113759756 thousands rupees in 2005 to 448651361 thousands rupees in 2015. In 2015 a slight decrease in agri-food exports was noticed comparatively to 2013 as result of overall world crises as the prices of most of the exported commodities decreases in world cotton was at the number 1 whose price decrease by 10% in international market.The trading structure also experienced many changes during the analyzed period of 2012-2016. Most of agri-food exports to the trading partners also increased with the passage of time in overall but if take individually pak-china and pak-KSA agri-trade was high in 2014-15 but it falls in 2016 as china is self-manufacturer of all the goods as well as the most impact because of the fallen prices of energy in world and the imports continuously increasing from the china but decreasing and somehow stable in case of KSA. In case of other 3 trading partners the exports are increasing in all cases with much differences and Pakistan imports not increase as much as the exports.Table 2 Pakistan agri-trade with trading partnersIn US thousand dollar.Group of countries Average 2012-13 2014 -15 2016China Exports 408 1394 244 Imports 4374 1319 1593Saudi Arabia Exports 31762 12099 2130 Imports 6115 6530 5657UAE Exports 16933 8010 2108 Imports 4288 5145 4112USA Exports 1296 1415 1691 Imports 225 284 341Kuwait Exports 997 195 1629 Imports 4 4 0Source: Own calculation based on trade map of PakistanDespite the fact that the share of Kuwait decreased it still represent an important market for Pakistan agri-food exports and any negative event or trend related to this market can threat the trade stability in the long run. Also, it does not stimulate and strengthen the diversification of Pakistan’s trade relations with other countries, particularly the Saudi Arabia, USA and UAE. These markets are highly competitive and it imposes strong barriers to enter it in terms of quality and food security which makes it difficult to enter it. Thus a boost in the competitiveness of the exported pakistan agri-food products is needed, and the full use of the existing potential to increase the trade flows with these states. The analysis of Pakistan’ intra-industrial agricultural and food products over 2012- 2016 is based on Grubel Lloyd (GL) index, calculated by commodity groups and by all trading partners, with respect to a specific group of countries as: China, Saudi Arabia UAE, USA and Kuwait. According to the results (Table 3) the level of intra-industry trade in agricultural and food products for Pakistan is quite high.Table 3: Grubel Lloyd indices of intra industry trade in agriculture and food trade between Pakistan and its main trading partners, 2012 to 2016.Groups of countries 2012 2013 2014 2015 2016 AverageChina 20.16 13.49 23.42 39.19 26.56 24.56Saudi Arabia 52.13 24.60 53.19 109.02 145.29 76.84UAE 6.90 28.07 56.16 130.30 132.21 70.72USA 41.23 21.93 37.25 30.36 33.56 32.86Kuwait 3.60 0 77.77 0 0 16.27Source: own calculationsDuring the analyzed time series, the GL index tends to increase with all its major trading partners except Kuwait.The downward trend for Kuwait, regarding exports can be explained as the lack of competitiveness for Pakistan agricultural and food products which make it difficult to access its market. The upward trend in relation to Saudi Arabia and UAE countries might be caused by the increase of imports from those countries. The evolution of GL index results by commodity groups is presented in Table 4.Table: 4 Intra industry trade by commodity group between Pakistan and trade partners, 2012 to 2016.HS code 2012 2013 2014 2015 2016 Average0106Live Animal 73.17 0 110.10 50.67 56.12 58.011701 Cane, Beet, Sugar. 59.40 8.92 31.44 95.48 69.07 52.862009Fruit & Juice 67.43 26.09 42.29 81.37 104.14 64.260304Fish Fillet… 8.82 76.56 42.94 6.82 28.78 32.780409Natural Honey 42.13 69.39 42.31 47.57 40.44 48. 31Source: Own calculation For some commodity groups the GL values present high variability over time, fact which reflects the structural changes in pakistan agri-food trade. High and average magnitudes of intra-industry trade presents the following commodities: Live animals (HS0106), cane, beet and sugar (HS1701), Fruit and Juice (HS2009), Fish and fish products (HS03024) and Natural Honey (HS0409). The commodities with low levels are mostly imported, mainly exotic products that are not produced in Pakistan. According to Kandogan (2003) 10 intraindustrial trade is more common in sector with significant product differentiation, but in those with standardized products trade tends to be more inter-industrial. CONCLUSIONS Pakistan’s agri-food trade flows experiences important changes during the examined time series. Both Pakistan’s exports and imports flows increased considerably, while agri-food imports increased faster than exports. Pakistan have an edge by not having landlocked country, and its geographic position not imposes difficulties in terms of costs for trade collaboration with many countries. But to some crises Pakistan have very less trade with neighboring countries. A strong table talk with neighboring countries can enhance the trade of agri-food. A strengthen of trade relations with UAE was accentuated due to the trade agreements signed. The level of intra-industry trade in agricultural and food products for Pakistan is quite high. The results of the intrindustrial level (GL) indicate a decrease with Kuwait and increase in relation with other countries. The downward trend for Kuwait, regarding exports can be explained as the lack of competitiveness for Pakistan agricultural and food products which make it difficult to access those markets. For most commodity groups the GL values present average high variability over time, fact which reflects the structural changes in Pakistan agri-food trade. Trade liberalization has as a positive outcome an increase in the volume of agri-food exports of Pakistan, particularly in terms of specialization and concentration of production and diversification of the geographical distribution. Another positive result is the decrease in the dependence on traditional markets. This fact imposed the increase in both quality and variety of exported articles. It is important to maintain the positions in relation with the main trading partners and to gather new market shares.REFERENCES http://www.larrywillmore.net/FreeTrade72.pdfhttp://www.tips.org.za/files/an_investigation_of_the_determinants_of_intra-industry_trade_between_zambia_and_its_trading_partners_in_sadc_mulenga.pdfhttps://www.cambridge.org/core/journals/canadian-journal-of-economics-and-political-science-revue-canadienne-de-economiques-et-science-politique/article/intra-industry-specialization-and-the-pattern-of-trade/741BF8C48CE4518CA523A205AE9E1405http://www.sciencedirect.com/science/article/pii/0014292186900309http://www.jstor.org/stable/2233080http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5965.1991.tb00411.x/fullhttp://www.sciencedirect.com/science/article/pii/0022199682900460https://link.springer.com/article/10.1007%2FBF02696856?LI=truehttps://link.springer.com/article/10.1007%2FBF02708125?LI=truehttp://www.tandfonline.com/doi/abs/10.1080/08853900903012310?src=recsys=uitj20


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