Page 222 - Global Political Economy_Understanding The International Economic Order

THE TRADI NG SYS TEM
has been a prominent feature of north-north trade, whereas interin-
dustry trade has tended to characterize north-south trade. How can
this type oftrade among advanced industrialized economies be ex-
plained?
The Heckscher-Ohlin model predicts that most trade should take
place among countries with dissimilar endowments and that intrain-
dustry trade should not even exist. Ifcomparative advantage and
trade patterns are determined by fixed endowments and relative
prices, why should the industrial countries in effect be “taking in one
another’s laundry”? This anomaly can be explained by differing na-
tional tastes, product differentiation, and economies of scale. Ameri-
cans, for example, traditionally like big cars, and Europeans, small
ones; Americans have tended to possess a comparative advantage in
the former and Europeans in the latter. Yet, there is a market in the
United States for small European cars and vice versa. Since the impor-
tance ofintraindustry trade was recognized, the Heckscher-Ohlin
model has been applied primarily to trade between developed and less
developed countries and not to the intraindustry trade based on prod-
uct differentiation and scale economies that is characteristic among
industrial countries.
However, here another anomaly is encountered. Japan, during
most ofthe latter halfof the twentieth century, imported a remark-
ably small share ofthe manufactured goods that it consumes. Unlike
Western European and U.S. trade, only a small portion ofJapanese
trade has been intraindustry trade—that is, a two-way flow oftrade
within particular industries. For example, whereas Japan was the
world’s largest exporter ofautomobiles for many years, its imports
ofautomobiles and auto parts were negligible. Instead, even in the
1990s, the pattern ofJapanese trade continued to be largely interin-
dustry trade; Japan was importing mainly food, fuel, and raw materi-
als and exporting mainly motor vehicles and other manufactures.
While this unique Japanese trading pattern began to change in the
final years ofthe twentieth century, it had long been a major source
ofeconomic conflict between Japan and its trading partners.

Integration of International Trade and Foreign Investment
Another important development in the postwar era has been the in-
creasing integration ofinternational trade and foreign direct invest-
ment (FDI) by multinational corporations (MNCs). When capital in
the form of portfolio investment became increasingly mobile across
borders in the late nineteenth century, economists assumed that inter-
national capital movements were due to differences among countries
in rates ofreturn and in investment risk. When foreign direct invest-

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