Ravindra A. Yatawara's blog

Trade theory has always been lagging behind reality. From Ricardo ‘s (1817) explanation of trade based on relative productivity/technology differences among nations, it took over a century for Eli Heckscher and Bertil Ohlin (1933) to formalize a model that would explain inter- industry trade patterns based on a countries ’natural resources or factor endowments. It was almost 50 years later that Paul Krugman incorporated scale economies and imperfectly competitive markets to explain intra- industry – the observed phenomenon that countries were trading the same product- for example importing and exporting cars. In the last few years, a new paradigm is evolving that moves away from viewing trade as solely the exchange of final goods to one that incorporates the growing role of global supply chains and the international exchange of tasks or activities- off-shoring. All these theories have implications for optimal trade policy, and policy advice that nations receive from trade economists.

The question is how far is the trade field from the reality frontier? Is there sufficient general equilibrium analyses of trade policy in developing economies? How relevant is policy advice based on current models? This note is not an analysis of whether outward-orientation is valid, but instead offers some new trade and trade policy realties, and identifies some areas where more work is needed to provide policymakers with valuable guidance in thinking about trade integration.