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science behavioral economic equilibrium empirical methods experimental econometrics time series spatial causal inference quasi experiments prescriptive and policy welfare analysis social choice theory rational choice theory cost benefit analysis branches and subfields applied econometrics econophysics international heterodox micro macro mainstream mathematical mech design methodology political industrial org market design applications agriculture business cultural demographic development ecological education engineering environmental evolutionary financial geographic happiness health history information infrastructure institutions labour law management non monetary organization participation personnel planning policy public sector public choice social choice regional regulatory resources rural service transport urban welfare economics portal v t e new trade theory ntt is a collection of economic models in international trade theory which focuses on the role of increasing returns to scale and network effects which were originally developed in the late 1970s and early 1980s the main motivation for the development of ntt was that contrary to what traditional trade models or old trade theory would suggest the majority of the world trade takes place between countries that are similar in terms of development structure and factor endowments traditional trade models relied on productivity differences ricardian model of comparative advantage or factor endowment differences heckscher ohlin model to explain international trade new trade theorists relaxed the assumption of constant returns to scale and showed that increasing returns can drive trade flows between similar countries without differences in productivity or factor endowments with increasing returns to scale countries that are identical still have an incentive to trade with each other industries in specific countries concentrate on specific niche products gaining economies of scale in those niches countries then trade these niche products to each other each specializing in a particular industry or niche product trade allows the countries to benefit from larger economies of scale some have used ntt to argue that using protectionist measures to build up a large industrial base in certain promising industries will then allow those industries to dominate the world market less quantitative forms of a similar infant industry argument against free trade have been advanced by previous trade theorists development edit graph illustrating krugman s core periphery model the horizontal axis represents costs of trade while the vertical axis represents the share of either region in manufacturing solid lines denote stable equilibria dashed lines denote unstable equilibria although aspects of trade with increasing returns had been worked out earlier especially in work by avinash dixit 1 new trade theory is associated with paul krugman s work in the late 1970s developing into what is known as the dixit stiglitz krugman trade model and the helpman krugman model krugman states that he originally learned about the effects of monopolistic competition on trade from robert solow but that theories of international economics a generation earlier had completely ignored returns to scale in 1996 he wrote the idea that trade might reflect an overlay of increasing returns specialization on comparative advantage was not there at all instead the ruling idea was that increasing returns would simply alter the pattern of comparative advantage 2 new new trade theory edit marc melitz and pol antràs started a new trend in the study of international trade while new trade theory put emphasis on the growing trend of intermediate goods this new trend emphasizes firm level differences in the same industry of the same country and this new trend is frequently called new new trade theory nntt 3 4 nntt stresses the importance of firms rather than sectors in understanding the challenges and the opportunities countries face in the age of globalization 5 as international trade is increasingly liberalized industries of comparative advantage are expected to expand while those of comparative disadvantage are expected to shrink leading to an uneven spatial distribution of the corresponding economic activities within the very same industry some firms are not able to cope with international competition while others thrive the resulting intra industry reallocations of market shares and productive resources are much more pronounced than inter industry reallocations driven by comparative advantage trade in intermediate products edit a new conspicuous phenomenon in the recent world trade is the rise of trade in intermediate goods and services a study of the organization for economic cooperation and development oecd 6 has found that intermediate inputs represent 56 of goods trade and 73 of services trade this is a result of fragmentation of production and the increasing importance of outsourcing which were in turn a result of rapid decrease of trade costs including transportation costs transaction costs and tariffs and revolutionary development of information and communications technologies trade in intermediate products are related to many phenomena such as offshoring vertical specialization global sourcing 7 the second unbundling 8 trade in value added trade in tasks global supply chains global value chains and global optimal procurement in short it is one of motive powers of internationalization and globalization traditional trade theories including heckscher ohlin samuelson theory and the new trade theory à la krugman exclude trade of intermediates products by assumption 9 and cannot explain fragmentation of production across countries fragmentation was first studied by ronald jones and henryk kierzowski 1990 10 they explained the fragmentation by the decrease of service link costs yoshinori shiozawa 2017 section 13 presented a new explanation by the decrease of trade costs 11 the service link explains how fragmentation occurs but does not explain how a pattern of specialization emerges trade cost explanation is naturally incorporated in shiozawa s theory of international trade and can be used in the account of global value chain emergence because it is a general framework which permits trade of intermediate goods and services 12 theoretical foundations edit new trade theory and new new trade theory nntt need their own trade theory new trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale one of the typical explanations given by paul krugman depends on the assumption that all firms are symmetrical meaning that they all have the same production coefficients this is too strict as an assumption and deprived general applicability of krugman s explanation shiozawa based on a much more general model succeeded in giving a new explanation on why the traded volume increases for intermediates goods when the transport cost decreases 13 new new trade theory nntt also needs a new theoretical foundation melitz and his followers concentrate on empirical aspects and pay little interest to theoretical aspects of nntt shiozawa s new construction or ricardo sraffa trade theory enables ricardian trade theory to include choice of techniques thus the theory can treat a situation where there are many firms with different production processes 14 based on this new theory fujimoto and shiozawa analyze how different production sites either of competing firms or of the same firms locating in the different countries compete 15 further information harberger laursen metzler effect econometric testing edit the econometric evidence for ntt was mixed and highly technical due to the timescales required and the particular nature of production in each monopolizable sector statistical judgements were hard to make in many ways the available data have been too limited to produce a reliable test of the hypothesis which doesn t require arbitrary judgements from the researchers citation needed japan is cited as evidence of the benefits of intelligent protectionism but richard beason argues the empirical support post war japan offers for beneficial protectionism is unusual and that the ntt argument is based on a selective sample of historical cases although many examples like japanese cars can be cited where a protected industry subsequently grew to world status regressions on the outcomes of such industrial policies which include failures have been less conclusive some findings suggest that sectors targeted by japanese industrial policy had decreasing returns to scale and did not experience productivity gains 16 implications edit the value of protecting infant industries has been defended at least since the 18th century for example alexander hamilton proposed in 1791 that this be the basis for us trade policy 17 what was new in new trade theory was the use of mathematical economics to model the increasing returns to scale and especially the use of the network effect to argue that the formation of important industries was path dependent in a way which industrial planning and judicious tariffs might control the models developed predicted the national specialization by industry observed in the industrial world movies in hollywood watches in switzerland etc the model also showed how path dependent industrial concentrations can sometimes lead to monopolistic competition or even situations of oligopoly some economists such as ha joon chang had argued that protectionist policies had facilitated the development of the japanese auto industries in the 1950s when quotas and regulations prevented import competition japanese companies were encouraged to import foreign production technology but were required to produce 90 of parts domestically within five years japanese consumers suffered in the short term by being unable to buy superior vehicles produced by the world market but eventually gained by having a local industry that could out compete their international rivals 18 see also edit general equilibrium endogenous growth theory was developed at a similar time to ntt and is linked through the idea that industrial and trade policy can affect over all productivity growth home market effect dixit stiglitz model references edit theory of international trade a dual general equilibrium approach cambridge university press 1980 isbn 0 521 29969 1 krugman p 1996 how to be a crazy economist in s medema and w samuels eds foundations of research in economics how do economists do economics melitz marc j 2003 the impact of trade on intra industry reallocations and aggregate industry productivity pdf econometrica 71 6 1695 1725 doi 10 1111 1468 0262 00467 jstor 1555536 antras pol helpman elhanan 2004 global sourcing journal of political economy 112 3 552 580 doi 10 1086 383099 s2cid 222435550 ottaviano gianmarco i p 2011 new new economic geography firm heterogeneity and agglomeration economies journal of economic geography 11 2 231 240 doi 10 1093 jeg lbq041 miroudot s r lanz and a ragoussis 2009 trade in intermediate goods and services oecd trade policy working papers no 93 oecd publishing doi 10 1787 5kmlcxtdlk8r en antràs p halpman e 2004 global sourcing journal of political economy 112 3 552 580 doi 10 1086 383099 s2cid 222435550 richard baldwin 2006 globalization the great unbundling s http repository graduateinstitute ch record 295612 files baldwin_06 09 20 pdf g grossman and e rossi hansberg 2006 the rise of offshoring it s not wine for cloth anymore proceedings economic policy symposium jackson hole federal reserve bank of kansas city pages 59 102 inomata s 2017 analytical frameworks for global value chanins an overview chapter 1 global value chain paradigm new new new trade theory p 15 in wto global value chain development report 2017 https www wto org english res_e publications_e gvcd_report_17_e htm jones r w and h kierzkowski 1990 the role of services in production and international trade a theoretical framework in r w jones and a o krueger eds the political economy of international trade oxford basil blackwell see also jones r w 2000 globalization and the theory of input trade cambridge ma mit press and jones r w and h kierzkowski 2001 a framework for fragmentation in s w arndt and h kierzkowski eds fragmentation new production patterns in the world economy oxford oxford university press shiozawa y 2017 the new theory of international values an overview in shiozawa oka and tabuchi eds a new construction of ricardian theory of international values singapore springer escaith h and s miroudot 2016 industry level competitiveness and inefficiency spillovers in global value chains paper presented at the 24th international input output conference 4 8 july 2016 seoul korea https www iioa org conferences 24th papers files 2437_20160523071_hesmtivaandsupplysideseoul2016finaldraft pdf shiozawa y 2007 a new construction of ricardian trade theory a many country many commodity with intermediate goods and choice of techniques evolutionary and institutional economics review 3 2 141 187 doi 10 14441 eier 3 141 s2cid 154021080 shiozawa y 2017 the new theory of international values an overview shiozawa oka and tabuchi eds a new construction of ricardian theory of international values singapore springer t fujimoto and y shiozawa inter and intra company competition in the age of global competition a micro and macro interpretation of ricardian trade theory evolutionary and institutional economics review 8 1 1 37 2011 and 8 2 193 231 2012 shiozawa y and t fujimoto 2018 the nature of international competition among firms t fujimoto and f ikuine eds industrial competitiveness and design evolution tokyo springer japan beason richard weinstein david e 1996 growth economies of scale and targeting in japan 1955 1990 review of economics and statistics 78 2 286 295 doi 10 2307 2109930 jstor 2109930 s2cid 153903905 alexander hamilton report on manufactures communicated to the house of representatives 5 december 1791 www constitution org ah rpt_manufactures pdf macewan arthur 1999 neo liberalism or democracy economic strategy markets and alternatives for the 21st century zed books isbn 1 85649 725 9 retrieved 4 april 2009 external links edit on the smithian origins of new trade and growth theories aykut kibritcioglu ankara university shows that adam smith s increasing returns to scale conception of international trade anticipated ntt by two hundred years krugman acknowledges ntt s debt to ohlin he writes that ohlin may have lacked the modelling technology necessary to incorporate increasing returns to scale into the heckscher ohlin model but that his book interregional and international trade discusses the consideration qualitatively v t e economics theoretical microeconomics decision theory price theory game theory contract theory mechanism design macroeconomics economic growth economic development mathematical economics complexity economics computa...