New trade theory versus old trade policy: a continuing enigma

This paper examines the theoretical and empirical grounds for trade liberalisation. We note that many of the conventional arguments relating to the static and dynamic gains from liberalisation are based on fragile theoretical grounds. We also show that, although new trade theory takes account of some of the complexities of international trade and although the analytical thrust of many models justifies intervention, such policy conclusions are rejected even by those at the forefront of these theories on the grounds of political economy arguments which do not stand up to careful scrutiny. Finally, we show that arguments favouring trade liberalisation are not supported by existing empirical research, which generally fails to capture the complex and ambiguous effects of liberalisation and openness.