TRADE-POLICY UNDER IMPERFECT COMPETITION - THE ECONOMICS OF RUSSIAN ROULETTE

Neo-classical economic theory shows that managed trade or protectionis m is (almost) always welfare decreasing. However, measurements of the welfare costs of protectionism based on neo-classical models seem to s uggest that these costs are quite small. We discuss general new insigh ts and developments in the theory, policy and empiricism of internatio nal trade. The observation that intra-industry trade and the services sector are important has led to a shift in theory away from constant r eturns to scale and perfect competition towards economies of scale and scope, externalities, market imperfections, and imperfect competition . Although this, in principle, opens the door to beneficial government intervention in the economic process, we emphasize that the true cost s of protection can potentially be much higher than is generally ackno wledged as a result of the above mentioned shift.