Specialization, Trade, and Growth

This paper shows the emergence of trade in a model with no Ricardian exogenous comparative advantage, and presents a formal analysis of the effects of tariff protection on international trade in the framework of the new classical trade theory. Using a model with no exogenous comparative advantage, equilibrium outcomes for the model are characterised, and comparative static analysis of the effects of changes in the level of tariff protection on the number of goods and on per capita real income for three important cases is explored. It is shown that in the case of no retaliation, i.e. when only one country imposes import duties on traded goods from another with no tariff, then the result on the real income of the country with tariff is not clear. In this case, the tariff produces a negative effect on trade and specialization on one hand, and a positive effect on the terms of trade on the other. However, in the case of full retaliation against any tariff imposed by a country or the case of a small country whose tariff action is unable to significantly affect international prices of traded goods, our result shows that the negative effect of protection is clear. Similarities and differences with the traditional theory are discussed.