Modern Trade Theory and Protectionism Flashcards
What is New Trade Theory based on?
Economies of Scale, both internal and external.
Internal Economies of scale are when firms have a high output because of high R&D and development costs, while
external economies of scale are when firms have agglomeration benefits by networking together in a set region and provide each other with services and have the effect of lower costs.
Companies with Market Power will set the price, but as the market becomes more oligopolistic, (oil, broadband, software) the quality of products becomes increasingly important. (this explains intra-industry as quality is vital).
New Trade Theory also includes first mover advantage, those who reach the market first with their goods/services will have higher output, while those who reach it later although having lower costs will have it as a result of low output.
How can New Trade Theory justify protectionism?
If a firm achieves competitive advantage by economies of scale, it makes theoretical sense for governments to help grow native industries so they can eventually compete on a global market level. Protectionism is a method of this; infant industries can build themselves up and when they have sufficient competitive scale can enter the world market.
How would Protectionism hurt consumers?
-Usually protectionism is met by retaliation, as was the case with the Smoot-Hawley Tariff in 1930 USA. Canada placed retaliatory import tariffs on 16 US goods, and moved to realign trade with the British Empire and the French.
Not only would prices rise, but lower trading means output is reduced, leading to higher costs, therefore a cut in labour is needed and a reduction in employment, causing reduction in consumption and a reduction in demand.
