New Trade Theory

New trade theory became popular in the 1960s and 1970s, when it replaced traditional international trade theories that focused on unlimited free trade and comparative advantage a way of explaining international patterns of trade. The new suggests that a critical factor in determining international patterns of trade are the very substantial economies of scale and network effects that can occur in key industries. If one countries specialists in a particular industry then it may gain economies of scale and other network benefits from its specialization. New trade theory also offers interesting insight on the subject of government regulation. At the time when the theory emerged, it countered traditional wisdom that supported unlimited free trade.

Domestic subsidization or tariff production would allow developing industries in developing countries to eventually exploit economies of scale and be competitive within the global market. But poorer countries with developing economies may struggle to ever develop certain industries because they lag too far behind the economies of scale enjoyed in the developed world. This is not due to any intrinsic comparative advantage, but more the economies of scale the developed firms already have.

Regards,

Keiko Kezia

Reference

http://www.economicshelp.org/blog/6957/trade/new-trade-theory/

http://internationalrelationsonline.com/new-trade-theory/