New Theories of Trade among Industrial Countries

Abstract

Most students of international trade have long had at least a sneaking suspicion that conventional models of comparative advantage do not give an adequate account of world trade. This is especially true of trade in manufactured goods. Both at the macro level of aggregate trade flows and at the micro level of market structure and technology, it is hard to reconcile what we see in manufactures trade with the assumptions of standard trade theory. In particular, much of the world's trade in manufactures is trade between industrial countries with similar relative factor endowments; furthermore, much of the trade between these countries involves two-way exchanges of goods produced with similar factor proportions. Where is the source of comparative advantage? Furthermore, most manufacturing industries are characterized by at least some degree of increasing returns (especially if we include dynamic scale economies associated with RD the arguments of many observers that much trade among industrial countries is based on scale economies rather than comparative advantage; and the common argument that a protected home market can promote exports. Until recently, however, none of these alternatives was presented in a form which economists would properly call a model: that is, a formal structure in which macro behavior is derived from micro motives. This lack of formalization essentially barred alternatives to comparative advantage, however plausible, from the mainstream of international economics. In the last five years or so, however, there has been a significant change. A number of theorists have begun to apply methods drawn from the theory of industrial organization to international trade, to produce a new genre of trade models. These models offer a new way of looking at tradeand particularly at manufactures trade among the industrial countries. A characteristic feature of the new models is that they often rely on very special assumptions. This is probably inevitable: given the inherent complexity of the world once the great simplifying device of constant returns is dropped, only special assumptions will yield tractable analysis. In spite of the specialness of individual models, however, the new literature on trade is starting to give rise to concepts which look more general than the particular models used to illustrate them. The purpose of this paper is to sketch out two such concepts which I believe are important and more general in application than the particular models in which they have been expressed. The first is the theory of intraindustry trade, a view which incorporates scale economies as well as comparative advantage as major causes of trade and gains from trade. The second is the (less well developed) theory of technological competition, which may begin to shed some light on the dynamics of international competition in research-intensive industries.

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