IPIC Summary Session

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IPICSummary Session 7New Trade Theory
Professor Vanessa Strauss-Kahn
Prepared by Group 8, E10 Roel COLLIER Maggie
LAI Veronique LESCAUT Anil NAMBIAR Jaromir
PEKLOMatthew PEREGRINE-JONES
INSEAD Fontainebleau, 17th September 2003
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Comparative Advantage theories review
Differences in factor productivity
(Ricardian)
Specialization
Gains from trade
Differences in costs
Trade
Differences in factor quantity
(Factor Abundance)
Inference
Fact
North specializes in cars South specializes in
wine and cheese Trade only between North and
South Protectionism destroys value Adjustment
costs and wage inequality (Stolper-Samuelson)
provide political argument for protectionism
South specializes in wine and cheese but also
produces cars North produces cars, but also a
beer and some wine too Majority of Trade within
and in between North Protectionism is successful
(South East Asia)
Conclusion
CA theories assume perfect markets with zero
entry/exit costs and totally homogenous goods CA
theories cannot explain majority of trade within
and between developed countries CA theories do
not provide necessary framework to explain
reality Competition is imperfect Economies of
scale exist Product is differentiated
The New Trade Theory
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New Theory of Trade Imperfect Markets

• Imperfect Competition
• Trade leads to pro-competitive gains
• Import discipline and foreign competition leading
  to lower prices
• Economies of Scale
• Trade gives access to bigger markets, leading to
  lower costs and prices
• Differentiated goods
• Product variety
• Input variety
• Inputs have embedded technology and RD
• New Theory ? New Gains from trade
• Explains intra-industry trade between similar
  countries
• Pattern of specialization unexplained
• Complements Comparative Advantage

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Implications for Government Policy

• Perfect Markets
• All industries are similar
• Goods are homogenous
• Nobody makes any economic profit
• Rent capture is not possible

• Imperfect Markets
• Different industries have different returns
• Some sectors can add more value to economy
  (Externalities, RD Spillovers)
• Pattern of specialization important
• (Strategic sectors)

• Case for Government Intervention (Economic
  argument)
• Oligopolistic markets
• Rent shifting through tariffs
• Government tariff revenue
• Profits of domestic firms
• Counter-arguments Zero-sum game, retaliation,
  government failures
• Externalities that private sector cannot account
  for
• Counter-arguments government failures