Modern Trade Theories

Economies of scale and competitive strategies

As discussed above to compete effectively the firms from smaller countries and smaller companies can adopt three strategies as follows:

Strategy A – Product Differentiation – That is to create a product that is a little bit different to the competitor’s products and price it differently and higher. In other words, specialize and intra-industry trade.

Strategy B – Governments of smaller countries adopt strategic trade policy to assist by government intervention to protect infant industries which can be grown  faster as possible to take advantage of economies of scale  by export subsidization and industry assistance to local actors.  As well, this strategy can be used when some industries have better possible growth rates than others and/or potential of positive externalities.

Strategy C – Free trade agreements and regional trade arrangements like EU, and other regional trade groups like APEC or Asian countries trade blocks top create big markets compared to local market alone.

Implications of strategic Trade policy

The orthodox and free trade policy advocated may be applicable to some goods not for all goods. For example it is applicable to potato chips but not for micro chips. However, strategic trade policy may not be consistent with WTO rules and may have some retaliation effects due to protectionism and other issues of selecting winners in an industry for government assistance, which is not easy in practice.

Conclusions

As discussed above, it is obvious that the orthodox trade policy based on neo-classical economic theory in practice advocated by WTO and other international bodies is not sufficient to guarantee fair trade in strategic industries. As well, the free trade may not benefit all counties as it is predicted by the free trade proponents and WTO because of imperfect markets and its inability to explain intra-industry trade and the problems of competition in an unequal paying field in many markets due to economies of scale advantages of big companies from big countries. As well protection is a norm in certain products exported from developed countries particularly in agricultural products and it disadvantages developing countries. That is free trade do not exists in real world due to many reasons including economic reasons.

In this context can be said strategic trade theories has a place and WTO riles must be made fairer taking in to consideration of the neo-classical economic theory limitations in the real world applicability. That is it must enable for regional integration  and must have fairer rules particularly in strategic industries where US and Japan has tremendous competitive advantage compared to companies from smaller countries. They must also m recognize the importance of foreign direct investment as an essential component of adjustment in relation to smaller countries. In addition, it must also take in to account the importance of industrial policy to attract international investors.

In summary, modern trade theories even though they are not consistent at the present time some models are more realistic to be adopted in the current market situation than the orthodox free trade economic theory which is too simplistic and static in nature. They are in effect a building block to develop a more coherent trade theory and it is necessary taking in to consideration the major flaws in the neo-classical trade theory and its predictions, which is empirically falsified to some extent particularly in strategic trade arena. Modern trade theory is a vital one given the anomalies and to develop economic theory which can be useful to governments and private sector to develop effective trade policies and practices.