International trade and domestic manufacturing industry.

摘要

This dissertation proposes an international trade theory based on profit and externalities to explain what originates international trade and the increase in the trade of differentiated products in the post-World War II era. In this theory two trading partners can specialize in the same line of production, whereas they cannot in Adam Smith's theory of absolute advantage, David Ricardo's theory of comparative cost advantage, or in the trade theories based on comparative cost advantage such as Heckscher-Ohlin's theory of factor endowments, Melvin's and Krugman's theories of increasing returns to scale. However, due to the specialization in the same line of production, domestic industry can be put at risk by foreign competition. Therefore, this dissertation proposes a duopoly model of differentiated products to determine the price that maximizes the profit of domestic producer. This is to prove that foreign competition decreases the domestic price and price-cost margin, and to determine the dividing line between free trade and protection so that the domestic industry can be protected when it is not far from being driven out of business by foreign competitor and free trade can be implemented, when it is not at risk. As a case study, it examines the competition between the U.S. and Japanese auto industry in the U.S. market which supports the theoretical framework and proposes a set of rules to avoid trade war and safely increase the wealth of the world community. To rescue the U.S. auto industry the U.S. imposed the voluntary export restraints on Japanese automobiles. In the light of this government intervention one wonders whether countries have followed Smith's hands-off or List's hands-on economic policy. This dissertation, therefore, shows that advanced industrial countries and new developing countries have followed List instead of Smith in order to protect their economic interests. This reliance on List's hands-on policy calls for an evaluation of Ricardo's theory which argues, that two trading partners mutually benefit from free trade if they specialize in the commodity in which they have a respective comparative cost advantage. Therefore, this dissertation evaluates Ricardo's theory of comparative cost advantage to exhibit its hidden flaws.