challenged the received wisdom by showing that, where the traditional assumptions of perfect competition do not hold, government intervention in trade may be beneficial. On the other hand, the models proposed are highly sensitive to the assumptions made about the market and about how firms behave. They are also applicable only to industries where average costs fall with output and existing firms earn excess profits in the long run. The practical usefulness of these models as a guide for countries in formulating their trade policies is open to question. However, if the case for government intervention in trade is a weak one, this begs the question why governments do, indeed, intervene extensively in trade whether by restricting imports or artificially subsidising exports. To answer this, we need to examine the political as well as the economic processes that help shape the commercial policy of countries, which, in modern times, takes place in an international context. The use of a political economy model to explain levels of protection, such as has been used by a number of economists in recent years, constitutes a positive step in this direction.
The best presentation of the standard gains from free trade that distinguishes between inter- and intra-industry specialisation is to be found in:
Greenaway, D. and Milner, C. The Economics of Intra-Industry Trade (Oxford and New York: Basil Blackwell, 1986).
This also contains a very useful chapter on adjustment cost and adjustment policy. Conventional texts on international trade often fail to separate the gains from trade under each type of specialisation.
For a thorough and rigorous examination of the major arguments for protection, students should use a conventional text such as:
Krugman, P. and Obstfeld, M. International Economics: Theory and Policy, 5th edn. (Addison-Wesley, 2000).
This also provides an excellent survey of the different forms of tariff and non-tariff protection. On protectionism, however, the interested reader should also read:
Bhagwati, J. Protectionism (Cambridge, MA, MIT Press , 1988).
It compresses into a small book a lot of excellent material on this subject. This covers both tariff and non-tariff forms of protectionism.
Another valuable text that contains several useful chapters on the subject matter covered in this chapter is:
Greenaway, D. (ed.). Current Issues in International Trade, 2nd edn. (London, Macmillan, 1996).
One of the chapters provides an excellent summary of political economy models of protection.
On strategic trade policy and the new trade theory, the reader will find the following a most helpful volume:
Krugman, P. (ed.). Strategic Trade Policy and the New International Economics (Cambridge, MA, MIT Press, 1988).