Pros and Cons of New Trade Theory

Question 1

List the pros of New Trade Theory

Answer 1

• Can explain intra-industry trade (quality plays a significant role, hence why cars are imported and exported between Germany and UK).
• Both NT Theory and Porter’s Diamond/Five Factors can explain protectionism in theory.
• Vertical FDI can be explained - take advantage of lower prices and better quality distribution/supply network (Nordgold in Burkina Faso)
• Horizontal FDI can also be explained - A reduction in transport Costs. (Honda Swindon Factory).

Question 2

List the Cons of New Trade Theory

Answer 2

• Cannot explain why FDI and owning resources to achieve lower costs is chosen over simply using markets in these countries to obtain inputs, and contracting designs to other companies.
• Can’t explain the link between imports, exports and FDI.