INTERNATIONAL ECONOMIC.

Topic 4: Use the New trade theory to explain the automotive industry.
1. is the New trade theory? (Dat)
2. Give an example of New trade theory?(Dat)
3. How do economies of scale dictate the global automotive industry?Give
example.(Nhi)
4. The role of product differentiation in it?(Nhi)
5. How does imperfect competition affect it?(Quynh)
6. How often did intra-industry trade occur in the automotive industry?
(Quynh)
1. What is the New trade theory?
- The New Trade Theory/, pri’marily developed by economists like Paul
Krugman, explores how economies of scale and product differentiation
affect the international trade patterns.
- It focus on 2 main contents:
+ The first one to mention is that/ by the expansion of economies of scale,
which increase the level of product range. As a result, this can be
beneficial in providing consumers a wide range of products with low cost.
+ The second idea worth mentioning is that in the international market,
countries who dominate a product line is the first producer who entry in
this industry since they have a significant amount of demand in the
general global demand.
 The value of the New Trade theory
- The New Trade theory conflicts to the Hesker – Ohlin theory in the
aspect of producing a particular product when there are incentives
( incentives for somebody to do something) for an industry to make a
particular product. However, it is one of explanations for the comparative
advantage theory.
- It gives out the answer for the question why 2 countries still have
two-way trading while there are many similarities between them.
2. Give an example of New trade theory?
A case in point is that in Large-scale automobile manufacturing, manufactures
are able to produce vehicles with a lower cost due to several factors. By
purchasing raw materials with a large quantities, these producer can negotiate
to have quantities discount or commercial discount which helps to reducing the
outcomes cost.
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thương lượng để được hưởng chiết khấu số lượng hoặc chiết khấu thương mại
giúp giảm giá thành cho sản phẩm đầu ra. )
– In summary, the New Trade Theory's application to the automotive industry
illustrates how economies of scale drive competitiveness and influence global
trade patterns by favoring large-scale producers capable of offering lower
prices and diverse product ranges.

3. How do economies of scale dictate the global automotive

industry? Give example.
The New Trade Theory (NTT) provides insights into how economies of scale
and product differentiation influence industries like automotive manufacturing
on a global scale.

1. Economies of Scale in the Automotive Industry:

Economies of scale refer to the cost advantages that enterprises obtain due to
expansion. In the automotive industry, these economies play a crucial role:

Production Cost Efficiency: Large-scale production allows automotive

manufacturers to spread their fixed costs (such as machinery, R&D, and plant
infrastructure) over a larger number of units, reducing the average cost per unit
produced. This is particularly significant in industries like automotive
manufacturing, where high initial investments are required for technology and
infrastructure.

Global Production Networks: Automotive companies often operate on a

global scale to take advantage of economies of scale. For example, companies
like Toyota, Volkswagen, and General Motors have production facilities in
multiple countries, allowing them to optimize production and assembly
processes and minimize costs.

Example - Volkswagen Group: Volkswagen is a prominent example of

leveraging economies of scale in the automotive industry. It produces vehicles
 under various brands (Volkswagen, Audi, Porsche, etc.) sharing platforms and
components across different models. This strategy helps in reducing costs per
vehicle and achieving economies of scale in production.

4. The role of product differentiation in it?

- Product Differentiation in the Automotive Industry:

Product differentiation involves creating products or services that are perceived

as unique by customers, thus distinguishing them from competitors' offerings. In
the automotive sector, product differentiation influences several aspects:

Brand Identity: Automotive companies differentiate their products through

branding, design, technology, and performance attributes. For instance, luxury
brands like Mercedes-Benz emphasize comfort and cutting-edge technology,
while brands like Jeep focus on ruggedness and off-road capabilities.

Target Market Segmentation: Differentiated products allow companies to

target specific market segments based on consumer preferences. Electric
vehicles (EVs) provide a recent example of product differentiation where
manufacturers like Tesla have differentiated themselves by focusing on long-
range capabilities and advanced autonomous driving features.

Example - Tesla: Tesla's success in the electric vehicle market illustrates

effective product differentiation. It has positioned itself as a leader in electric
mobility by offering vehicles with long ranges, superior acceleration, and
advanced self-driving capabilities. This differentiation has enabled Tesla to
carve out a distinct market segment and build a strong brand following.

Conclusion: The New Trade Theory highlights how economies of scale and
product differentiation shape the global automotive industry. Economies of
scale drive efficiency and cost reduction through large-scale production, while
product differentiation allows companies to cater to diverse consumer
preferences and establish competitive advantages. By considering economies of
scale and product differentiation, the New Trade Theory provides a more
nuanced understanding of the global automotive industry beyond just traditional
cost advantages.
5. How does imperfect competition affect it?
- In the automotive, imperfect competition has a big impact on
everything from innovation to consumer choice.
- Impact on the automotive industry:
• Limited Choice: While there are many car manufacturers, the
market isn't perfectly competitive. This means a few major players
hold a significant share, potentially limiting consumer choice in
specific segments.
• Product Differentiation: Car companies invest heavily in brand
image, design features, and technological advancements to
differentiate their products. This focus on differentiation can lead to
higher prices compared to a perfectly competitive market where all
products are identical.
• Advertising and Marketing: Imperfect competition incentivizes
car companies to spend heavily on advertising and marketing to
influence consumer preferences and brand loyalty. This can make it
difficult for smaller players or new entrants to compete effectively.
• Focus on Profitability: Since car companies aren't price takers in a
perfectly competitive market, they have some control over pricing.
This can lead to a focus on maximizing profits rather than solely
driving down production costs and offering the lowest possible
prices to consumers.
• Barriers to Entry: The high cost of research and development,
setting up manufacturing facilities, and establishing dealer networks
can create significant barriers to entry for new car companies. This
reinforces the dominance of existing players in the market.
- However, competition can drive innovation in automotive areas such as
performance, safety features and technology in cars, potentially giving
consumers better overall products. Brand differentiation can lead to
strong brand recognition and a loyal customer base, fostering trust and
potentially simplifying the car buying process for regular customers.
6. How often did intra-industry trade occur in the automotive
industry?
- The automobile sector engages in a lot of intra-industry trade (IIT) and
there are two main types of automotive industry in intra-industry
trade:Horizontal IIT and Vertical IIT.
a. Horizontal IIT: HIIT plays a significant role in the modern automotive
industry, shaping competition, consumer choice, and production
strategies.
- Characteristics of HIIT in Autos:
• Similar car models: HIIT involves trading cars within the same
segment or category. For example: Sedans competing with sedans,
SUVs with SUVs, etc. These cars might have slight variations for
different markets but generally offer similar features and
functionalities.
• Focus on competition: HIIT thrives on established automakers
competing in international markets. This competition drives
innovation in design, technology, and potentially lowers prices for
consumers.
• Economies of scale: Manufacturers can leverage economies of scale
by producing similar models across different locations. This allows
them to spread fixed costs over a larger volume, potentially
reducing production costs per unit.
- Factors Affecting HIIT in Autos:
• Trade policies: Free trade agreements or reduced tariffs significantly
influence HIIT by making international car sales more accessible.
Lower trade barriers ease the flow of cars across borders.
• Consumer preferences: Variations in consumer tastes across
regions can drive HIIT. For instance, a surge in demand for electric
vehicles in one region might lead to increased imports of those
models from countries with established EV production.
• Production costs: If producing a car model is cheaper in one
country due to factors like labor costs or access to resources, it
might be exported to another country with domestic production,
creating HIIT.
b. Vertical IIT: Vertical intra-industry trade (VIIT) is another facet of
intra-industry trade (IIT) specific to the automotive industry. Unlike
horizontal IIT which focuses on similar car models, VIIT deals with
the exchange of different car parts or complete vehicles with varying
quality levels within the same industry.
- Understanding VIIT in Cars:
• Differing Quality Levels: VIIT involves trading car parts or
complete vehicles with varying qualities. This could range from
 high-end luxury car components being exported to budget car parts
being imported. Even finished cars can be part of VIIT, with a
country exporting luxury models while importing budget models
from the same manufacturer.
• Production Fragmentation: VIIT is a strong indicator of production
fragmentation in the auto industry. Manufacturers often strategically
locate production facilities in different countries based on factors
like labor costs, access to resources, or expertise in specific car
parts. This allows them to optimize production efficiency and
potentially reduce overall costs.
- Factors Influencing VIIT in Autos:
• Trade policies: Trade agreements or relaxed tariffs can significantly
boost VIIT by making the import and export of car parts more
economical.
• Production costs: Variations in production costs across countries
significantly influence VIIT. Countries with lower labor costs or
readily available resources might specialize in specific car parts,
leading to VIIT.
• Technological advancements: Advancements in automation and
logistics can make VIIT more efficient and cost-effective,
encouraging further fragmentation in car production.