The Noncompetitive Theory of International Trade and Trade Policy

Abstract

This paper reviews recent theoretical developments in the analysis of trade structure and policy. It emphasizes how understanding monopolistic (noncompetitiive) market structures and elements can help explain trade flows and the relation between trade and growth, and can be useful in evaluating tariffs, quotas, and research and development subsidies in noncompetitive markets. Noncompetitive trade theory identifies testable relations that have already received empirical support in various studies. Once their significance is recognized, it is important to take them into account in designing policy. Policies exist that raise welfare, but simple policy prescriptions do not. Theory helps to identify situations in which particular policies work, but under only slightly different circumstances opposite policies may have to be implemented. Recent studies have shown that long-run growth rates depend on an economy's structural features and the country's trading partners. So policy can affect long-run growth - but identifying useful policies requires an understanding of market structure and conduct, entry constraints, intersectoral links, and the like. More empirical studies are needed to elicit this information. Meanwhile, policy should be designed on a case-by-case basis and - because good policies improve welfare only slightly - no intervention (free trade) remains a good rule of thumb. All the more so when one takes into account the competitive pressure of a free trading world system, the probability of retaliation, and the political economy of protection.