1. Briefly summaries the alternative explanations to the theory of International Trade?

Critically examine the Strategic Theory of International Trade.

Alternative explanations of trade: The presence of economies of scale in production also may influence trade patterns, generally encouraging nations to specialise to a greater extent in their comparative advantage industries. If economies of scale are extreme, they may specialise completely in production of export goods. This is yet another departure from the traditional comparative advantage theories. .Another significant development in recent years is the expansion of trade in services has raised new questions about how the concept of comparative advantage might apply in these areas, although we often tend to think of trade as involving primarily raw materials and manufactured products Finally, two other factors that influence international trade patterns but are not incorporated in simplified trade theories are transportation costs and environmental regulations. Transportation costs effectively prevent the complete international equalisation of prices for traded goods, with the price in the importing nation exceeding that in the exporting nation by the amount of the transport costs. In the similar manner environmental regulations generally increase production costs Another important recent phenomenon that can be viewed within this general framework is the growing tendency towards intraindustry trade, creates intense pressures for governments to adopt industrial policy strategies to protect and enhance domestic market and export market shares which the comparative advantage theories fail to explain.. This is captured in the 'New Trade Theory' or the 'Strategic Trade Theory' Strategic trade policy Strategic trade policy refers to trade policy that affects the outcome of strategic interactions between firms in an actual or potential international oligopoly. A main idea is that trade policies can raise domestic welfare by shifting profits from foreign to domestic firms. A well-known application is the strategic use of export subsidies, but import tariffs as well as subsidies to R&D or investment for firms facing global competition can also have strategic effects. Since intervention by more than one government can lead to a Prisoners Dilemma, the theory emphasizes the importance of trade agreements that restrict such interventions the term strategic in this context arises from consideration of the strategic interaction between firms. It does not refer to military objectives or the 2 importance of an industry. The existence of strategic interaction is the defining characteristic of oligopoly. The term trade policy is interpreted broadly here as any policy directed pr imarily at the level or pattern of trade. In particular, policies that change the incentives for investment or research and development (R&D) in the context of international oligopoly represent an important application in the literature. The requirement that the oligopoly be international implies that production is actually or potentially carried out in two or more countries. Trade policy instruments set by one country then tend to affect the strategic choices of firms located in that country differently from firms located abroad. Strategic trade policy typically exploits these differential effects so as to achieve a domestic objective at the expense of welfare in other countries. Most applications of strategic trade policy assume that firms differ by ownership as well as country of location. This assumption focuses attention on the importance of the policy in shifting profits from foreign to domestic firms. Criticism

Horstmann and Markusen (1986) focus on assumptions regarding production technology. They suggest that subsidies and tariffs can promote entry by less efficient firms and raise the industry average cost. Dixit and Kyle (1985) argue that it is important to consider the question of who is behaving strategically with respect to whom. Potential responses such as government retaliation and changes to market structure are ignored in the Strategic Trade Theory.

2. Give rationale for Import Substitution Industrialisation (ISI) strategy. Discuss the important policy issues involved in implementing the ISI strategy.

Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with [1] domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products Industrialisation based on producing import substitutes rather than producing for exports was recommended. Such import substituting industrialisation would tackle many of the constraints to faster growth. Nurkse had argued that one of the fact rs limiting investment in developing countries was lack of demand. But if im i orts were restricted, it would create demand for previously imported goods, so entrepreneurs could be depended upon to invest in import substituting industries. Also, economists were in general pessimistic about prospects of the world economy based on the experience of the inter-war years. They expected the world economy to grow very~slowly; there was supposed to be a bias towards stagnation. Economists like Nurkse also expected the continuation of the pre Second World War pattern of countries adopting extensive restricti s on trade, particularly, on exports of labour intensive goods fiom devel ing countries. Furthermore, developing countries were expected to need ? t me to develop the skilled and productive labour force necessary to be competitive in the world market. For all these reasons, many economists recommend the adoption of an IS1 strategy for development Policy issues for Implementing an IS1 Strategy Important policy issues in implementing the IS1 strategy were what instruments to use and who was to be responsible for investment? Countries tended to adopt quantitative restrictions (QRs) to curtail imports This was because QRs were believed to provide more certain signals to prospective investors in the protected industries. The impact of tariff protection could be uncertain as prices might fluctuate. Furthermore, most countries adopted an import substitution strategy in consumer goods industries, with the private sector playing the leading role in undertaking investments. It was believed that stoppage of consumer goods imports would lead the transnational corporations (TNCs) who were supplying the imported goods fiom abroad to undertake the production of similar goods in the developing country itself, thereby solving the problems of adequacy of investible funds, technology transfer and of shortages of entrepreneurship. A few countries, mainly India, also undertook import substitution in capital goods industries under the aegis of the state.. such state sponsored industrialisation raised more complex issues of generating sufficient investible funds as well as getting the technology to establish the plants to produce the capital goods

4. Explain how under the WTO, differential treatment in reverse is different from the Special and Differential (S&D) treatment.
The WTO Agreements contain special provisions which give developing countries special rights and which give developed countries the possibility to treat developing countries more favorably than other WTO Members. These special provisions include, for example, longer time periods for implementing Agreements and commitments or measures to increase trading opportunities for developing countries. These provisions are referred to as special and differential treatment provisions. The special provisions include: longer time periods for implementing Agreements and commitments, measures to increase trading opportunities for these countries, provisions requiring all WTO members to safeguard the trade interests of developing countries, support to help developing countries build the infrastructure for WTO work, handle disputes, and implement technical standards, and provisions related to Least-Developed country (LDC) Members.

Differential treatment in reverse is the condition in which the organization act in favour of developed countries in negation to the S&D provisions.