Vertical and Horizontal Intra-Industry Trade between the U.S. and NAFTA Partners

E.M. Ekanayake, Bala Veeramacheneni, Carlos Moslares

Abstract


The main objectives of this paper are to (a) explain the extent of vertical and horizontal intra-industry trade in the United State’s foreign trade with the North American Free Trade Area (NAFTA), and (b) identify the industryspecific determinants of vertical and horizontal intra-industry trade. One of the main findings is that the observed increase in intra-industry trade between the United States and NAFTA is almost entirely due to two-way trade in vertical differentiation. Another important finding is that the share of horizontal intra-industry trade has increased significantly during this period, although vertical intra-industry trade continued to be dominant in the U.S.-NAFTA IIT Trade. Among the industry-specific variables, product differentiation, vertical product differentiation, and product quality differences are found to have a positive effect on all three types of IIT shares. Industry concentration and industry size are found to have a negative and statistically significant effect on all three types of IIT share.

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