Wikipedia: new trade theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s. New trade theorists relaxed the assumption of constant returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantitative forms of a similar “infant industry” argument against totally free trade have been advanced by trade theorists since at least since early mercantilists. 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.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.
The theory was initially associated with Paul Krugman in the late 1970s; Krugman claims that he heard about monopolistic competition from Robert Solow. Looking back in 1996 Krugman wrote that International economics a generation earlier had completely ignored returns to scale. “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.” In 1976, however, MIT-trained economist Victor Norman had worked out the central elements of what came to be known as the Helpman–Krugman theory. He wrote it up and showed it to Avinash Dixit. However, they both agreed the results were not very significant. Indeed, Norman never had the paper typed up, much less published. Norman’s formal stake in the race comes from the final chapters of the famous Dixit–Norman book. James Brander, a PhD student at Stanford at the time, was undertaking similarly innovative work using models from industrial organisation theory—cross-hauling—to explain two-way trade in similar products. New trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale.
Rodrik 1988 sobre a nova teoria do comercio:
“To many policymakers in developing countries, the “new” trade theory, with its emphasis on imperfect competition and returns to scale, must appear as a vindication of sorts. For the recent literature has led to a considerable weakening of the traditional neoclassical presumption against policy intervention in foreign trade. The journals are now filled with examples of governments “creating” comparative advantage by exploiting imperfections in markets for goods and technologies and increasing returns to scale. This new emphasis on the indeterminacy of comparative advantage contrasts starkly with the advice these policymakers have typically received regarding the necessity to specialize in unsophisticated, labor-intensive commodities. Indeed, by focusing on learning effects, the new literature has provided some of the best arguments for infant-industry protection since Alexander Hamilton and Friedrich List. The diehard import substituters may now legitimately wonder if the learning processes so important to the U.S. semiconductor industry (see Baldwin and Krugman 1986) are not equally relevant to a wide spectrum of basic industries in developing countries.
As the last example illustrates, the new literature is also a frustrating reminder to the South that too often ideas become intellectually respectable only when they become congruent with the interests of major Northern countries. Hence it is more than a little ironic that the new trade theory has developed against the backdrop of trade conflicts among developed countries, and between the United States and Japan, in particular. Market imperfections of the sort analyzed in this context would appear to be, if anything, more serious in the developing countries. Yet the new insights have still to penetrate the vast literature on trade policy in developing countries. Anne Krueger’s (1984) survey of the field, for example, found no applications to developing countries worthy of mention. The predominant approach to trade policy in developing countries remains based on intuition and insights deriving exclusively from models with perfect competition. In practice, of course, the actual policy debates between import substituters and liberalizers have long been carried outside the confining framework of perfect competition. The import substituters remain suspicious of trade liberalization for reasons, not always well articulated, having to do with technological externalities and scale effects.
They fear that resources will be reallocated away from the more modern, capital- and knowledge-intensive sectors with unexploited scale economies. The liberalizers, on the other hand, have long proceeded in syncretic fashion. In their role as academic economists, they typically build models in which perfectly competitive markets guide the allocation of resources along lines of comparative advantage. But in their role as policy advocates, they have been driven by the discouragingly small size of the Harberger triangles their models yield to fortify their arguments by appeal to the procompetitive and beneficial scale effects of more open trade regimes. Hence the great advantage of the new approach: it may bring theory and policy much closer than they have so far stood. In truth, there are elements in the new theories of trade that give comfort to both camps.
In the presence of imperfect competition and increasing returns to scale, trade liberalization is compatible both with a magnification of the welfare gains and with welfare losses. It all depends on how the economy is expected to adjust, which in turn depends on the frustrating ambiguities of oligopoly theory. At one extreme, we could imagine that free entry eliminates all excess profits and that liberalization rationalizes industry structure by reducing the number of firms and forcing the remaining ones down their average cost curves. In such a view of the world, the benefits of trade liberalization can easily amount to several times the usual Harberger triangles. Harris’s (1984) calculations with such a model of Canada show that industry rationalization reduces manufacturing costs to such an extent that the net outcome is an expansion of the manufacturing sector, a sector in which Canada has prima facie a “comparative disadvantage.” This kind of story suggests a wonderful way to sell trade liberalization to policymakers in developing countries: liberalization may actually help expand the modern sectors! But at the other extreme, we can imagine a world in which the contracting sectors tend to be those with Imperfect Competition in Developing Countries with supernormal profits and unexploited industrywide scale economies. The protectionists’ fears may then well be justified.”