How New is the "New Trade Theory" of the Past Two Decades?

Abstract

This paper looks at the paradigm of the past two decades that goes under the name of "new trade theory" or "new international economics", and rejects the assumptions underlying mainstream trade theory such as constant returns to scale and perfect competition. Authors contributing to it include Krugman, Dixit, Lancaster, Grossman, Helpman, Brander, Spencer and Ethier. After describing the main tenets of this new paradigm, Section 1 explores in greater depth the reasons for its birth. The new trade theory offers rationales for trade that often dispense altogether with the notion of comparative advantage, and new insights into the nature of the gains from trade. Section 2 examines its antecedents in the history of economic thought, which hark back to Adam Smith's productivity theory of trade according to which productivity rises when specialization is stimulated by a more extended market. Section 3 attempts to measure the "progress" which the new trade theory has achieved with respect to these classical antecedents, and studies its relation to the infant industry argument for protection popularized by J. S. Mill. Section 4 assesses the progress claimed by the new trade theorists with respect to the mainstream theory of trade. Section 5 draws some conclusions, and explores whether the theoretical advances of the new trade theory constitute a net advance over similar theories formulated in the classical period.