Do Strategic Trade Theories Provide A Theoretical

Introduction Nowadays, the traditionally established advantages of free throw seem to be accepted by all members of the World conduct government activity promoting world-wide tariff reduction to increase global welfare. However, most nations do not practise this principle but use batch barriers to protect domestic industries. One cureconomic rent example is provided by the US government discussing drastic market protection for its make fabrication legally justified by section 201 of the Trade Act 1974 (see: The Times, 2001), however, fundamentally against the WTOs vision of free trade.

The reflexion of such and other real-world phenomena as well as changing economic theory (see Krugman 1986, 5-10) recently resulted in new approaches to trade policy favouring government intervention into market structures.

The aim of this undertake is to examine if these new theories provide a theoretical acknowledgment for protectionist trade policies.

Arguments for government intervention The contemporary approaches, so-called strategical trade theories brinyly argue that a government displace enhance national welfare by promoting domestic knowledge of industries that create substantial factor rents or external benefits (Stegemann 1996, 83). The concepts of rent and external economies were developed by Paul R. Krugman and, being the main strategic arguments, shall now be examined in detail (for the pursuance see Krugman 1986, 12-14).

In the economic context rent is referred to as payment to an input spunkyer than what that input could earn in an alternative use (Krugman 1986, 12) and means for instance exceptional high profits or wages in industries with ordinary levels of happen or skills required. According to the traditional trade theories, in utterly competitive markets such deviations would rapidly be competed away by new market entrants. In reality, however, markets are imperfect and received circumstances like important advantages from economies of scale or industry experience might impede market entry and wherefore preserve abnormal returns.

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