Comment on A. Dixit, "Issues of Strategic Trade Policy for Small Countries"

Abstract

clearly points out a new direction for research on international trade and strategic behavior. How does a small country fare in a world of conflicting interests? In the standard trade model, the small country by the very virtue of its size comes out as a big winner when the world moves from autarky to free trade. It suffices to have a world consisting of only two countries - a big one and a small one - to get across the message of the importance of being unimportant. Of course, such smallness can only be associated with large terms-of-trade gains provided that the large country refrains, for one reason or another, from using its monopoly power. The question of gains from trade in a world consisting of more than two countries, and preferably of more than two goods, becomes quite tricky. It is not at all clear that a small country can gain proportionally more than its bigger trading partners. Examples in support of the conclusion of the standard two-country model could easily be imagined, but examples yielding the opposite conclusion are equally easy to concoct. It seems to me that models consisting of at least three countries are