The Legacy of Conventional Textbook Trade Theory in the Light of Globalization

Abstract

The term "globalization" designates the rapidly advancing international economic integration through substantial growth in trade of goods and services as well as surging cross-border factor mobility from the early 1990s onwards.This acceleration in the liberalization of world trade and capital movements is largely attributable to technological progress which significantly curtailed the expenses for transport as well as communication. In conjunction with the progressing opening of major newly industrializing economies endowed with abundant and cheap labor forces, it has reinforced a geographical fragmentation of production processes according to cost considerations. This phenomenon termed as "vertical specialization", "outsourcing" or also "slicing the value chain" in turn has translated into a hike in FDI and international trade of intermediate products. The main objective of this paper is to identify adequate trade models for assessing the corresponding effects of those developments. In this context, textbook trade theories spanning from comparative advantage à la Ricardo to the new-new trade theory are examined. Subsequently, we expand on globalization-induced new forms of trade (intra-firm trade, trade within the value chain) and finally conclude with our findings to properly account for those trends.