foreign market, and by focusing on only a few versions of the product, it
can achieve the benefits of the associated scale economies. The result is
that different countries specialize in different versions of similar products,
and then trade with one another. Such trade is referred to as intra-
industry trade and reflects the prevalence of scale economies and product
differentiation in many industries.
This aspect of trade was first dramatically illustrated when the European
Common Market (now known as the European Union) was established in
the late 1950s. Economists had expected that specialization would occur
according to the theory of comparative advantage, with one country
specializing in cars, another in refrigerators, another in fashion and
clothing, another in shoes, and so on. This is not the way it worked out.
Instead, much of the vast growth of trade was in intra-industry trade—that
is, trade of goods or services within the same broad industry. Today, one
can buy French, English, Italian, and German fashion goods, cars, shoes,
appliances, and a host of other products in Paris, London, Rome, and
Berlin. Ships loaded with Swedish furniture bound for London pass ships
loaded with English furniture bound for Stockholm, and so on. But the
firms involved in this production are more likely to reap the benefits of
the economies of scale than they could if they were producing only for
their own domestic markets.
The same increase in intra-industry trade driven by scale economies
happened with Canada–U.S. trade over successive rounds of tariff cuts
that were negotiated after the Second World War, the most recent being
those associated with the 1989 Canada–U.S. Free Trade Agreement, and