Trade and competition: An industrial economist's perspective

Theory and empirical evidence both suggest that free trade increases competition, improves market performance in imperfectly competitive international markets, and increases not only overall welfare but also the welfare of individual trading nations. Such improvements occur partly because an increased number of rivals reduces equilibrium economic profits, partly because it makes tacit collusion less likely, and partly because more open international markets stimulate industry restructuring and the more efficient use of productive resources. There is little reason to think that strategic trade policy - subsidies or export cartels - will improve market performance. Although such measures may benefit the firms concerned, the extra profits that accrue to business are unlikely to exceed the cost to the public of the strategic measures. Export cartels may well facilitate tacit or overt collusion on the domestic market. Special-interest groups will seek protection from the competitive pressure that comes with open trade, and anti-dumping policy provides a GATT-consistent vehicle by which such protection can be put into place. Full realisation of the efficiency and welfare gains that can be had by allowing open international rivalry requires that such protectionist measures be resisted.