Flat Earth Economics: Is There a New International Trade Paradigm?

Scott, Robert E.
September 1993
Challenge (05775132);Sep/Oct93, Vol. 36 Issue 5, p32
Academic Journal
This article examines the international trade policies of the U.S. as of September 1993. There has been an explosion of research on the economics of trade in imperfectly competitive markets in the past fifteen years. In spite of these developments, a tremendous effort has been made by some of the leading scholars in the new theory of international trade to prevent this research from being used to justify activist trade policies. Neoclassical trade theory assumes that trade patterns are determined by relative supplies of factors of production and/or by differences in tastes and technology. Neoclassical theory explains why the U.S. exports corn and wheat and imports oil which are patterns of interindustry trade that are clearly related to the endowments of natural resources. The theory of comparative advantage cannot explain intra-industry trade, wherein one country both imports and exports similar products in the same industry. The new view of trade helps us to understand why countries engage in intra-industry trade and why firms engage in foreign direct investment. One of the most important concerns of the new trade theory is the positive effect that government policy can have on trade and incomes by taking advantage of market imperfections.


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