Import Quotas, Export Promotion and Intra-industry Trade

Despite more than a quarter century of intense research into the phenomenon of intra-industry trade (the import and export of goods belonging to the same industry, hereafter abbreviated as IIT), several important puzzles remain: the existence of IIT even at highly disaggregated levels of classification, the growing significance of IIT in developing countries, and the contradictory results of econometric studies that seek to relate IIT to economies of scale or trade policy. After a brief recapitulation of the evidence, and why existing theory does not adequately explain it, a model that provides a new explanation is presented here. The key element in this model is the role of import quotas and similar quantitative restrictions (QRs) in permitting oligopolistic home firms to discriminate price between the protected domestic market and the competitive foreign market.