Horizontal and Vertical Intra-Industry Trade in Trans-Tasman Bilateral Trade

Horizontal and Vertical Intra-Industry Trade in Trans-Tasman Bilateral Trade

This paper disentangles trans-Tasman intra-industry trade (IIT) into horizontal IIT (HIIT) and vertical IIT (VIIT), and uses country-specific features to investigate their determinants in an econometric framework. Results suggest that trans-Tasman IIT is dominated by VIIT and concentrates mainly (about 50%) on two highly protected industries, namely machinery and equipment, and textile, clothing and footwear. This suggests that the closer economic relations (CER) may be contributing to trade diversion rather than trade creation. It appears that despite similarity in resource endowments between Australia and New Zealand the determinants of HIIT and VIIT are sensitive to the country specific characteristics. Hence, assuming similarity across countries in cross-country studies is unjustifiable.