1 Country-Specific Determinants of Vertical Intra-Industry Trade

Intra-industry trade has received much attention in the New Trade Theory. The focus has been on horizontal product differentiation, i.e. products with similar qualities. Empirically, however, most studies have been concerned with total intra-industry trade, and few attempts have been made to divide total intra-industry trade into its horizontal and vertical components. The vertical component of intra-industry trade refers to trade in products with different qualities. This paper focuses on vertical intra-industry trade and its country-specific determinants, which are discussed in a simple model from which testable hypotheses are drawn. The determinants are related to both demand (income distribution and income levels) and supply (factor proportions) effects. The paper also discusses the development of vertical intra-industry trade in the manufacturing sector between Poland and EU in the 1990s, and provides evidence of increasing vertical intra-industry trade over time with all partner countries. The econometric analysis shows that income distribution, market size and factor proportions are most relevant as determinants of vertical intra-industry trade between Poland and EU.