Understanding International Trade Patterns: Advances of the 1990s

The first objective of the field of international trade is to understand why countries trade. Such a positive account of the origins of trade must precede policy analysis. The 1980s were dominated by a single major advance in thinking about trade patterns. It is sufficiently important that Krugman [1990] is justified in calling it a “quiet revolution”. Imperfect competition in product markets and increasing returns to scale in production long had a toehold in the field, but little more. These topics existed at the margins of the A prerequisite for making informed decisions on trade policy is to have an empirically relevant theory of why countries trade. Yet, until recently, the field of international trade was almost entirely dominated by theory, with little testing of models’ predictions. Moreover, the tests that had been carried out inspired little confidence in the veracity of the models, even though they continued to be the foundation for trade policy analysis. The 1990s marked a decisive shift in the analysis of trade patterns. There continued to be important theoretical contributions, notably in the work on economic geography. But more importantly, there has been a flourishing of empirical work. This work has made important progress not only in applying the models but also in identifying the assumptions that have been crucial in prior rejections of the theory. Moreover, the empirical work has moved in the direction of understanding the types of hybrid theories required to fit the data. This “new empirical trade” promises to deliver models which will provide a much more sound foundation for policy analysis. The survey focuses on the most recent developments in empirical research motivated by evolving trade theory. It therefore provides a picture of an ongoing and still yet maturing process. Given the complexity of much of the work the description provides a guide of lines of work at the frontier of the economic profession for further reading rather than a comprehensive summary of definitive results and answers to policy questions. Understanding International Trade Patterns: Advances of the 1990s