Intra-industry trade takes place when a country simultaneously exports and imports similar kind of goods and services, where similarity is identified if traded goods are classified in the same “sector”. For instance, if we focus on sector “textiles”; then intra-industry trade takes place, if Pakistan exports garments to Bangladesh and simultaneously imports garments from Srilanka. According to New Trade Theory, intra-industry trade allows economies to specialize in limited number of products and take advantage of increasing returns, but at the same time it increase the variety of goods available to consumers.
Literature on trade distinguishes between two types of intra-industry trade, horizontal and vertical. Horizontal intra-industry trade involves trade in different variety of same good within same stage, same quality and same price bracket. This occurs because of differentiation that provides diversity in consumption. On the other hand, vertical intra-industry trade consists of trade in different goods that are part of production value chain of a final good. Benefits of intra-industry trade critically depend on how efficiently each stage of production in a value chain is geared up from different regions.
An example from textile sector would be to make yarn related production in Pakistan, processing for cloth in Bangladesh and printing and marketing through India. This must ensure that stages of production take place where these are most cost effective, which will consequently result in tremendously competitive international market. Evidences show that South Asia has very sluggish growth in intra-industry trade. There are many non-economic and economic factors responsible for such a slow growth in intra-industry growth.
One of the major reasons is South Asian countries have traditionally preferred to have their end consumers from outside the South Asian region which is also a reason for low competitive markets within South Asian region. Moreover, other critical factors determining the flow and size of intra-industry are following. * Subsidies, preferential market access and undervalued exchange rate, that cause unfair competition. * Poor logistics and infrastructure which is also a problem for inter-industry trade. Unpredictability in policies, extensive documentation, and high unofficial payments that increase cost of doing business. * Lack of compliance in upgrading quality according to international standards. Reduction in trade barriers, exchange rate alignments, product differentiation, exchange rate and deeper tariff reforms are important move towards higher growth in intra-industry trade and specialization. Furthermore, transport bottlenecks, that are responsible for high delivery cost, must be reduced as they can be critical to value chain and international competitiveness.
Specifically road structure and rail routes are required to improve for smooth flow of trade both within individual countries and among the member countries of the region. Moreover, member countries of South Asian region must downsize the non-tax barriers by taking sector specific measures. Issues related to compliance with international standards of quality and assurance can only be resolved by following sectoral approach. While some other issues only needed proper flow of information to increase understanding.
As compliance makes market entry easier, it will increase opportunities of trade. Finally, to successfully enhance regional integration, all member countries are required to make investments for improving logistic infrastructure, flow of information, and relaxing the non-tax barriers. Finally all member countries must improve and shift their product lines simultaneously for growing regional and international demand. Success in regional integration is only possible if member countries work like a partnership to achieve their common goal.