International trade and imperfect competition : theory and application to the automobile trade

This paper develops a formal general equilibrium trade model for imperfect competition, a model easily applied to actual situations. The model shows that in the long run, international trade brings about five gains: (1) consumers can enjoy a wider selection of goods through the introduction of foreign goods; (2) monopolistic power of domestic producers is weakened by foreign competition; (3) the unit cost of production is reduced by foreign competition and by further use of increasing returns to scale technology; (4) contrary to popular belief, foreign competition reduces unemployment in the long run by rectifying labor market imperfections; and (5) international division of labor encourages savings in fixed costs, and the saved capital resources can facilitate economic growth. The model is also applied to the U.S. auto trade in 1986 to estimate the magnitude of the five effects. The model is general enough for the analysis of many industries in both developed and developing countries.