C. Vanmarrewijk et Pag. Vanbergeijk, ENDOGENOUS TRADE UNCERTAINTY - WHY COUNTRIES MAY SPECIALIZE AGAINST COMPARATIVE ADVANTAGE, Regional science and urban economics, 23(5), 1993, pp. 681-694
Using an approach where the probability of trade is a function of the
volume of trade, we show that uncertainty in international trade may f
orce a small economy to specialize in the production of the good in wh
ich it has a comparative disadvantage. This reversal in the pattern of
incomplete specialization in production is not reflected in the trade
pattern. The first-best policy response in the presence of endogenous
uncertainty is not the imposition of tariffs or subsidies but a reduc
tion of trade uncertainty itself, possibly through clear commitment to
free trade or GATT rules and procedures.