Horizontal and Vertical Intra-Industry Trade of NAFTA and MERCOSUR : The Case of the Automobile Industry

The NAFTA and MERCOSUR agreements seem to have accelerated the regional integration process respectively within North and South of America. In the South in particular, MERCOSUR has led to trade liberalization and deregulation, which has resulted in significant growth of its regional trade. In this article, we study the pattern of that trade growth in the automobile industry. Our results highlight an increase of intra-industry trade in the corresponding industry since the beginning of the 1990s. To obtain the calculation of the importance of intra-industry, we use the Grubel and Lloyd indicator (1975). Then to follow the method set out by Abd-el-Rahman (1991), Greenaway et al. (1995), Fontagné and Freudenberg (1997), we distinguish horizontally differentiated goods from vertically differentiated goods using a comparison of the unit values. Subsequently, with the increase of intra-industry trade, it appears that MERCOSUR has favoured in particular the development of trade in vertically differentiated goods. In NAFTA, intra-industry trade exists in most sectors and in two bilateral relations (United States Canada and United States Mexico). In MERCOSUR, the automobile industry has experienced the highest rate of growth in intraindustry trade, which accounts for 66% of total trade and 90% of all intra-regional trade. Consequently, we analyze the nature of that increase and more precisely, the determinants of intra-industry trade. In order to explain the pattern of trade for the automobile industry, we present an econometric model integrating principles of gravity, which takes into account some country-specific variables