Summary
Neo-classical economic theory shows that managed trade or protectionism is (almost) always welfare decreasing. However, measurements of the welfare costs of protectionism based on neo-classical models seem to suggest that these costs are quite small. We discuss general new insights and developments in the theory, policy and empiricism of international trade. The observation that intra-industry trade and the services sector are important has led to a shift in theory away from constant returns to scale and perfect competition towards economies of scale and scope, externalities, market imperfections, and imperfect competition. Although this, in principle, opens the door to beneficial government intervention in the economic process, we emphasize that the true costs of protection can potentially be much higher than is generally acknowledged as a result of the above mentioned shift.
Similar content being viewed by others
References
Balassa, B. (1986), ‘Intra-industry Specialization: A Cross-country Analysis,’European Economic Review, 30, pp. 27–42.
Balassa, B. (1976), ‘Trade Creation and Diversion in the European Common Market: An Appraisal of the Evidence,’ in: H. Glejser (ed.),Quantitative Studies of International Economic Relations, Amsterdam, North Holland.
Bergeijk, P.A.G. van (1994),Economic Diplomacy, Trade and Commercial Policy, Aldershot, Edward Elgar.
Bergeijk, P.A.G. van and C. van Marrewijk (1994), ‘Economic Sanctions: A Hidden Cost of the New World Order,’ in: M. Chatterji, H. Jager, and A. Rima (eds),The Economics of International Security, London, MacMillan, pp. 168–182.
Bhagwati, J. (1993), ‘Fair Trade, Reciprocity, and Harmonization: The Novel Challenge to the Theory and Policy of Free Trade,’ in: D. Salvatore(ed.),Protectionism and World Welfare, Cambridge, Cambridge University Press.
Bowen, H.P, E.E. Leamer and L. Sviekauskus (1987), ‘Multicountry, Multifactor Tests of the Factor Abundance Theory,’American Economic Review, 77, pp. 402–414.
Brakman, S. (1991),International Trade Flow Modeling: Decomposition Analyses, Groningen, Wolters Noordhoff.
Brakman, S. and C.J. Jepma (1995), ‘Protectionisme: politieke en economische aspecten,’ Financiële en Monetaire Studies, Groningen, Wolters Noordhoff.
Brander, J.A. (1995), ‘Strategic Trade Policy,’NBER Working Paper Series, No. 5020, Cambridge.
Brander, J.A. and B.J. Spencer (1985), ‘Export Subsidies and International Market Share Rivalry,’Journal of International Economics, 16, pp. 83–100.
Dixit, A. and V Norman (1980),Theory of International Trade, Cambridge, Cambridge University Press.
Dujat (1995),Success in Japan, Sassenheim, pp. 66–69 (in Dutch).
Emerson, M., D. Gros, A. Italianer, J. Pisani-Ferry, H. Reichenbach (1992),One Market, One Money, Oxford, Oxford University Press.
Ethier, W. (1982), ‘National and International Returns to Scale in the Modem Theory of International Trade,’American Economic Review, 72, pp. 389–405.
Fase, M.M.G. (1985), ‘The Statistical Properties of Glejser's Measure of Intra-industry Trade Specialisation,’Journal of international Economics, 28, pp. 375–382.
Fase, M.M.G. and C.C.A. Winder (1995), ‘Produktie, werkgelegenheid en loonontwikkeling in Nederland: toetsing van de wetten van Verdoorn en Baumol,’De Nederlandsche Bank/Kwartaalbericht: Overige berichten, September 1995, pp. 11–25.
Feenstra, R.C. (1995), ‘Estimating the Effects of Trade Policy,’NBER Working paper, No. 5051, Cambridge.
Greenaway, D. and D. Sapsford (1994), ‘What does Liberalization do for Exports and Growth,’Welt Wirtschaftliches Archiv, 130, pp. 152–174.
Grossman, G.M. and E. Helpman (1991),Innovation and Growth in the Global Economy, MIT Press, Cambridge.
Grubel, H.G. and P.J. Lloyd (1975),Intra-industry Trade: The Theory and Measurement of International Trade in Differentiated Products, New York, John Wiley.
Grubel, H.G. and M. Walker (1989),Services Industry Growth., Vancouver, Fraser Institute.
Haaland, J.I. and VD. Norman (1992), ‘Global Production Effects of European Integration,’ in: L.A. Winters (ed.),Trade Flows and Trade Policy after ‘1992’, Cambridge, Cambridge University Press.
Harris, R.G. (1991), ‘Symposium- The Canada-U.S. FTA: Economic Impact and Transition Effects,’Journal of Policy Modelling, 13, pp. 421–434.
Head, K., J. Ries and D. Swenson (1995), ‘Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investments in the United States,’Journal of International Economics, 38, pp. 223–247.
Helpman, E. (1987), ‘Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries,’Journal of the Japanese and International Economics, 1, pp. 62–81.
Helpman, E. and P.R. Krugman (1985),Market Structure and Foreign Trade, Cambridge, MIT Press.
Helpman, E. and P.R. Krugman (1989),Trade Policy and Market Structure, Cambridge, MIT Press.
Hoekman, B.M. (1993), ‘New Issues in the Uruguay Round and Beyond,’Economic Journal, 103, pp. 1528–1539.
Huber, J.R. (1971), ‘Effect on Prices of Japan's Entry into World Commerce after 1858, ’Journal of Political Economy, 79, pp. 614–628.
Hummels, D. and J. Levinsohn (1993), ‘Monopolistic Competition and International Trade: Reconsidering the Evidence,’NBER Working Paper, No. 4389.
IMF (1994), ‘International Trade Policies: The Uruguay Round and Beyond,’ Volume I and II, WorldEconomic and Financial Surveys, Washington.
Kremer, P. (1993), ‘The O-ring Theory of Economic Development,’Quarterly Journal of Economics, pp. 551–575.
Krugman, P.R. (1979), ‘Increasing Returns, Monopolistic Competition, and International Trade,’Journal of International Economics, 9, pp. 469–479.
Krugman, PR. (1980), ‘Scale Economies, Product Differentiation, and the Pattern of Trade,’American Economic Review, 70, pp. 950–959.
Krugman, P.R. (1991), ‘Increasing Returns and Economic Geography,’Journal of Political Economy, 99, pp. 483–499.
Krugman, P.R. (1994), ‘Competitiveness; A Dangerous Obsession,’Foreign Affairs, March/April, pp. 28–44.
Krugman, P.R. (1993a), ‘Regionalism versus Multilateralism: Analytic Notes,’ in: J. de Melo and A. Panagariya (eds.),New Dimensions in Regional Integration, Cambridge, Cambridge University Press.
Krugman, P.R., and R.Z. Lawrence (1993b), ‘Trade, Jobs and Wages,’ NBER Working Paper, No. 4478, Cambridge.
Leamer, E.E. (1984),Sources of International Comparative Advantage: Theory and Evidence, Cambridge, MIT Press.
Leamer, E.E. (1994), ‘Testing Trade Theory,’ in: D. Greenaway and L.A. Winters (eds.),Surveys in International Trade, Oxford, Basil Blackwell.
Leamer, E.E. (1995),The Heckscher-Ohlin Model in Theory and Practice, Princeton Studies in International Finance No. 77, Princeton, New Jersey.
Magee, S.P., W.A. Brock and L. Young (1989), ‘Black Hole Tariffs and Endogenous Policy Theory: Political Economy in General Equilibrium,’ Cambridge, Cambridge University Press.
Markheim, D. (1994), ‘A Note on Predicting the Trade Effects of Economic Integration and Other Preferential Trade Agreements: An Assessment,’Journal of Common Market Studies, 32, pp. 103–110.
Markusen, J.R. (1986), ‘Explaining the Volume of Trade: An Eclectic Approach,’American Economic Review, 76, pp. 1002–1011.
Markusen, J.R. (1989), ‘Trade in Producer Services and in Other Specialized Intermediate Inputs,’American Economic Review, 79, pp. 85–95.
Markusen, J.R., J.R. Melvin, W.H. Melvin, W.H. Kaempfer, and K.E. Maskus (1995),International Trade: Theory and Evidence, New York, McGraw-Hill.
Marrewijk, C. van, J. Stibora and A. de Vaal (1996), ‘Services Tradeability, Trade Liberalization, and Foreign Direct Investment,’forthcoming in Economica.
Miller, M.H. and J.E. Spencer (1977), ‘The Static Economic Effect of the UK Joining the EEC: A General Equilibrium Approach,’Review of Economic Studies, 44, pp. 71–94.
Ministerie van Economische Zaken (1994),De GATT Uruguay Ronde: resultaten en gevolgen, Den Haag.
OECD (1992),Industrial Policy in OECD Countries, Annual Review 1992, Part 4, OECD, Paris, pp. 167–191.
OECD (1993),Industrial Policy in OECD Countries, Annual Review 1993, OECD, Paris.
Pilat, D. (1993),The Economics of Catch-up: The Experience of Japan and South Korea, Dissertation, Groningen.
Richardson, J.D. (1988), ‘Empirical Research on Trade Liberalisation with Imperfect Competition: A Survey,’OECD Working Paper, No. 58.
Rivera-Batiz, L. and P. Romer (1991), ‘International Trade with Endogenous Technological Change,’European Economic Review, 35, pp. 971–1004.
Rivera-Batiz, L. and E Romer (1991b), ‘Economic Integration and Endogenous Growth,’Quarterly Journal of Economics, 106, pp. 531–556.
Romer, P (1994), ‘New Goods, Old Theory, and the Welfare Costs of Trade Restrictions,’Journal of Development Economics, 43, pp. 5–38.
Sach, J. and A. Warner (1995), ‘Economic Reform and the Process of Global Integration,’Brookings Papers on Economic Activity, 1, pp. 1–118.
Sazanami, Y., S. Urata and H. Kawai (1995),Measuring the Costs of Protection in Japan, Washington, Institute for International Economics.
Solow, R.M. (1994), ‘Perspectives on Growth Theory,’Journal of Economic Perspectives, 8, pp. 4554.
Spencer B.J. and J.A. Brander (1983), ‘International R&D Rivalry and Industrial Strategy,’Review of Economic Studies, 50, pp. 707–722.
Strange, S. (1995), ‘European Business in Japan: A Policy Crossroads?,’Journal of Common Market Studies, 33, pp. 1–25.
Tybout, J.R. (1993), ‘Internal Returns to Scale as a Source of Comparative Advantage: The Evidence,’American Economic Review Papers and Proceedings, 83, pp. 440–444.
UNCTAD (1993),World Investment Report, Geneva.
UNCTAD and World Bank (1994),Liberalizing International Transactions in Services, United Nations, Geneva.
Winters, L.A. (1993), ‘The European Community: A Case of Successful Integration?,’ in: J. de Melo and A. Panagariya (eds.),New Dimensions in Regional Integration, Cambridge, Cambridge University Press.
World Trade Organization (1995),Regionalism and the World Trading System, Geneva.
Zwet, A. van der (1995), Enige effecten van globalisering op de Nederlandse economic,DNB-MEB Serie, No. 1995–96, Amsterdam.
Author information
Authors and Affiliations
Corresponding author
Additional information
We would like to thank, without implicating, Martin Fase, Harry Garretsen, Catrinus Jepma, Simon Kuipers, Ger Lanjouw, Tenn Schmidt, Albert de Vaal, and Jean-Marie Viaene for stimulating conversations and useful suggestions. We thank Thijs Knaap for excellent research assistance.
Rights and permissions
About this article
Cite this article
Brakman, S., Van Marrewijk, C. Trade policy under imperfect competition: The economics of Russian roulette. De Economist 144, 223–258 (1996). https://doi.org/10.1007/BF01681902
Issue Date:
DOI: https://doi.org/10.1007/BF01681902