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What is a New Trade Theory?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 23 September 2016
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New trade theory is an economic theory developed by economists in the 1970s that somewhat contradicted the arguments for unlimited free trade that were popular at the time. The model developed by these economists suggested that it might benefit countries with an advantage in producing certain goods to initially protect the trade of such goods. By doing so, the economic advantage for the producing company might be more greatly realized, especially in the future. In this way, the theory suggests that monopolies or oligopolies aren't necessarily a bad thing on the world market, either for businesses or consumers.

One of the founding principles of the free trade model is the perfect competition principle, which suggests that multiple producers of goods competing with each other ultimately reduce prices for consumers and that this situation is the most beneficial for the society at large. New trade theory flies in the face of this to some extent by accepting the fact that some countries have specific advantages in producing certain goods. It also takes into consideration some of the difficulties of the globalization of trade.

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This theory isn't ultimately against global trade between countries. It simply suggests that those with a comparative advantage, in other words those who can produce more of a specific product at lower cost than their competitors, may exploit this advantage, dominate the market, and still eventually benefit the consumer. This advantage might come due to natural factors within a country such as climate or natural resources, or those countries might enjoy a labor advantage when producing a particular product.

In addition, new trade theory attempts to understand and explain the way that global trade affects the variety of goods available to consumers around the globe. Even though countries may have no particular disadvantage in producing a particular type of good, they may still import this good from another country. This, in turn, produces more variety for the individual consumer.

Even as the consumer enjoys greater variety, the process actually decreases the variety of goods around the world, as certain brand names become staples of the worldwide economy. For this reason, the practice of protecting infant industries as a way of making them more desirable is somewhat inimical to typical free trade theories. New trade theory also supposes an increasing scale of production, which is the model that states that as input factors increase, output levels actually increase at a higher level. This again is a determining factor in increasing variety for consumers throughout the world, even if it doesn't necessarily lower prices.

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Proxy414
Post 4

@arod2b42

This kind of a system sounds like a Utopia. Everybody knows you can't find Utopia on a map.

arod2b42
Post 3

@Renegade

I am convinced that free trade would be better for the world in the long run. Sure, we'd have to ease into it gradually, but the internet is already providing a clear venue for that. I also think people are fully capable of regulating their own trade practices. Regardless of whether a certain policy would be better for a given nation if it has sanctions, it would be better for the world in general if it were more free.

Renegade
Post 2

@hangugeo112

I think that it is necessary for countries to establish policies in order to protect businesses from exploitation or from exploiting. It also protects the long-term effectiveness of businesses, which I don't think businesses would be interested in doing on their own. Most people want to make quick money, and aren't interested in thinking about the future. The recent market crash is case in point.

hangugeo112
Post 1

China follows an unspoken new trade theory in their strict policy of saving. If you want a good example of long-term focus and maximizing future profit, look no further than China. Their economic policy makes up for what it lacks in innovation with a strong policy of risk-avoidance and preparation for any future problems via saving. In learning to be frugal with our money, it may be that a free market will be attainable without legal trade sanctions.

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