Patterns of Trade Between Countries

According to comparative advantage theory, developing countries should export labour-intensive goods like agricultural products, textiles and footwear and import capital and technology intensive goods like cars, computers, and machinery from developed countries. This is because developing countries tend to be relatively more abundant in labour hence wages are relatively lower but are relatively lacking in capital and technology as compared to developed countries.

Comparative advantage theory however can at best only explain inter-industry trade, which refers to international trade between different industries e.g. UK exports cars to China but imports textiles from China. It does not explain intra-industry trade, which is international trade in goods and services that belong to the same industry. e.g. France, Italy, Spain, Germany, and the UK are all developed countries which manufacture cars, but they also export and import cars to and from each other.

The traditional explanation for intra-industry trade is that countries trade in similar products because of the demand amongst consumers for product variety. For example, although Germany is a major car producing country, some German residents may prefer French cars, thus some French cars will be imported into Germany to meet such demand.

However, with increasing globalisation and resulting rise in global supply chains, much intra-industry trade is explained by international trade in intermediate goods and services of the same product. For example, Korea may have substantial intra-industry trade in telecommunication products. This is because it may be exporting mobile phone components like the display screens and processors to China but importing the final assembled product which is the phone itself from China.