In this chapter, I introduce the concept of intra-industry trade, discuss measurement issues, and trace its rise in the postwar period. Next, I present descriptive statistics on sector- and country-level patterns in intra-industry trade, demonstrating that it tends to occur most intensively among differentiable manufactured goods and among developed economies that specialize in the production of these goods. Third, I discuss the economic rationale for intra-industry trade, drawing on the work of economists who pioneered new trade theory by explaining why countries with similar factor endowments would trade for similar goods. Fourth, I discuss the distributional effects of intra-industry trade and the contributions of new–new trade theory to the crucial point that intra-industry trade causes resources to reallocate within industries, rather than across industries. I present an extended example of these effects through discussing the effects of trade liberalization between Canada, Mexico, and the US.

Unlike the industrial policies of other countries, which are mostly guidelines, China’s industrial policy is more like a corporate strategy that approves/disapproves projects and mobilizes the country’s resources to help its firms achieve dominance. Due to its size, the effects of China’s industrial policy have a powerful global impact. The general pattern of its industrial policy is that the state identifies certain industries and determines them to be high priorities. Once an industry is designated as strategically important, the state will mobilize all necessary resources from across the country to develop this industry. The state will pick some domestic firms as national champions, and erects barriers to foreign firms entering the industry. With a large, protected domestic market, the designated firms will be able to quickly realize the necessary scale and to lower unit production costs. Once the designated domestic firm becomes efficient, the state will support it as it goes out and dominates the world market. The cases of electronic vehicle batteries, solar panels, and high-speed rail are used to show how China’s industrial policy helps its firms to gain global dominance.

This chapter provides an introduction to the phenomenon of intra-industry trade in both its horizontal and vertical varieties. It introduces the monopolistic competition model of intra-industry trade, a central model of new trade theory. It discusses the smooth adjustment hypothesis, and an appendix introduces the Grubel–Lloyd index of intra-industry trade.