Economics Dictionary of ArgumentsHome
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| New Trade Theory: The New Trade Theory suggests that through economies of scale and network effects, some countries can dominate in certain industries, even without traditional comparative advantage. It explains the prevalence of intra-industry trade and emphasizes the role of increasing returns and market size in shaping international trade patterns. See also International trade, Strategic trade policy, Trade policy. _____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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James Brander on New Trade Theory - Dictionary of Arguments
Krugman III 2 New Trade Theory/Brander/Spencer/Krugman: In the early 1980s James Brander and Barbara Spencer (1983(1), 1985(2)) created a considerable stir with an analysis of trade policy under imperfect competition. The Brander-Spencer analysis did three things. First, it offered a particularly clever way of setting up the case for activist trade policy, one which simplified the issue enormously and thereby revealed its core. Second, it seemed to suggest that the new trade theory provided at least limited support for a kind of neo-mercantilism, for the assertion that governments could in fact raise national income at other countries’ expense by supporting national firms in international competition. Third, and not without importance, the BranderSpencer approach could be succinctly described with a term that, while accurate, seemed to promise a larger prize than Brander and Spencer themselves ever suggested: “strategic trade policy.” What the Brander-Spencer approach actually consisted of was the following: we imagine two firms, from each of two countries, competing for some export market. Domestic consumers in this sector are ignored or assumed away, so that the approach is inherently biased toward a view of trade as competition rather than mutual gain. Krugman III 3 Competition: The firms compete by choosing the level of some strategic variable: perhaps output, perhaps capacity, perhaps R&D. In this kind of competitive situation, firms would like to convince each other of their aggressiveness. That is, each would like the other to believe that it will invest or produce massively, thereby inducing the other to produce or invest less, perhaps even to avoid entering the market at all. The problem is to find a way to make the threat of aggressive competition credible. The answer suggested by industrial organization theorists is that firms will make “strategic” moves-that is, take actions that do not directly raise profits, but that are intended to make aggressive behavior more credible and therefore have a deterrent effect on potential rivals. Solution: The quintessential strategic move is construction of excess capacity, which a firm does not expect to use, but which it builds in order to deter entry of potential competitors. Trade policies: What Brander and Spencer pointed out was that trade policies could serve the same strategic purpose. Suppose that one of the two firms is backed by a government, which commits itself to subsidize the firm’s sales. Then the other firm will know that an aggressive policy by the subsidized firm is rational and will curtail its own plans. The result can be to raise the firm’s profits by much more than the actual subsidy outlay. And as a result, such a “strategic” trade policy can raise the aggressive nation’s income at the other country’s expense. >Interventions, >Interventionism, >Government policy. VsBrander/VsSpencer: The Brander-Spencer analysis nicely cuts through the complexities. But it is also subject to abuse: it has enabled advocates of aggressive trade policies to give their views a new intellectual gloss. Thus the theory of strategic trade policy has been subject to an unusually detailed academic critique, the upshot of which has been to show that what Brander and Spencer offered was an example, not a general result. Eaton and Grossman (1986)(3) showed that the case for strategic aggressiveness was sensitive to the assumed form of competition; Horstmann and Markusen (1986)(4 showed that the benefits of strategic trade policy might be dissipated by entry of new firms and the resulting excess capacity; Dixit and Grossman (1986)(5) showed that competition for scarce resources among industries complicates greatly the task of devising a welfareimproving policy; and Dixit and Kyle (1985)(6) argued that strategic trade policies should be seen as part of a larger game in which it would often be better for governments to rule out their possibility. New Trade Theory: Krugman: What this academic critique showed was not that the strategic trade policy concept was wrong, but that it was not necessarily right. Or to put it more accurately, the case for strategic trade policies was not like the traditional case for free trade, which (in the old trade theory) could be made a priori without consideration of the specific details of industries. Strategic trade policies could be recommended, if at all, only on the basis of detailed quantitative knowledge of the relevant industries. So what the new trade theory gave rise to was not a prescription for policy, but a program of research. >Econometrics, >Imperfect competition, >International trade theory, >New trade theory. 1. Brander, J., and B. Spencer. 1983. International R&D rivalry and industrial strategy, Review of Economic Studies 50:707-22. 2. Brander, J., and B. Spencer. 1985. Export subsidies and market share rivalry. Journal of International Economics 18233-100. 3. Eaton, J., and G. Grossman. 1986. Optimal trade and industrial policy under oligopoly. Quarterly Journal of Economics 101:383-406. 4. Horstmann, I., and J. Markusen. 1986. Up your average cost curve: Inefficient entry and the new protectionism. Journal of International Economics 20:225-49. 5. Dixit, A., and G. Grossman. 1986. Targeted export promotion with several oligopolistic industries. Journal of International Economics 21:233-50. 6. Dixit, A., and A. Kyle. 1985. The use of protection and subsidies for entry promotion and deterrence. American Economic Review 75: 139-52. Paul Krugman. (1994). „Introduction“. In: Paul Krugman and Alasdair Smith (Eds.) Empirical Studies of Strategic Trade Policy. Chicago: The University of Chicago Press._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Brander, James EconKrug I Paul Krugman Volkswirtschaftslehre Stuttgart 2017 EconKrug II Paul Krugman Robin Wells Microeconomics New York 2014 Krugman III Paul Krugman Alasdair Smith Empirical Studies of Strategic Trade Policy Chicago: The University of Chicago Press 1994 |
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> Counter arguments against Brander
> Counter arguments in relation to New Trade Theory
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