NEW TRADE THEORY

“Your Internet is fine. It's the apps. Now you know why monopolies are a bad idea.”

This tweet by Paytm when Facebook and its apps were facing global outage summarizes the advantages and disadvantages of the New Trade Theory. Despite being developed in the 1970s by Paul Krugman the irony behind calling it “new” lies in the fact that it strongly contradicts the other old International Trade theories which concentrate on comparative advantage to certain countries over certain products based on their location, climate, etc. 

According to old trade theories, a country should produce and export a single product based on comparative advantage, hence lower cost, and import other essential products and commodities. On the other hand, NTT is based on the implications of economies to scale and suggests that a country can export or import any product. Economies to scale refer to large scale production of certain products along with high degree of specialization and efficiency which decreases per unit cost of product and increases total profit. NTT along with free international trade helps in increasing choices and varieties of products for the consumers. NTT implies that nation may benefit from trade even when they do not differ in resource endowment or technology. A country may dominate in  the export of certain products simply because it was lucky enough or due to technological leadership gained a first-mover advantage. First movers’ ability to benefit from increasing returns creates a barrier of entry for other firms.

The most famous example is of Boeing and Airbus in the commercial aircraft industry.

This dominance may have been further reinforced because global demand may not be sufficient to profitably support another producer of mid-sized and large jet aircrafts. This also results in monopolistic competition.

“With globalisation, a consumer has more varieties but the world as a whole has less varieties.”

This quote is best understood by the example of WhatsApp. There are many other and better messengers in the market like Telegram, Signal but WhatsApp has the benefit of monopoly. This could be explained by the benefit (or maybe disadvantage xD) of NTT known as the Bandwagon Effect. According to this, the value of a product is enhanced as the number of individuals using it increases. Consumers like more choices, but they also want products and services with high utility.

By:

Lakshay Gupta