International trade theory has enjoyed a renaissance in the last decade. One innovation has combined theoretical insights from industrial economics and game theory with new empirical tools such as computable general equilibrium (CGE) models. Another has entailed the examination and quantification of `administered protection', such as anti-dumping duties and unfair trade practice suits. The International Seminar in International Trade (ISIT) aims to provide a forum for the `new' trade theory and its policy applications, especially in the work of younger economists.
The first Seminar was held on August 24-25 at St Catherine's College, Oxford, as a collaboration between CEPR and the National Bureau of Economic Research. Financial support on the CEPR side was provided by the John D and Catherine T MacArthur Foundation, the American Express Company, the American Express Bank Economics Unit, and American Express Travel-Related Services, UK and Ireland; and the NBER side from The Starr Foundation. The academic organizers were Robert Baldwin (University of Wisconsin and NBER) and L Alan Winters (University of Wales, Bangor), Co-Director of CEPR's International Trade programme. Economists from Britain, continental Europe and North America participated in the seminar.
During the period of the strong dollar in the early 1980s, the foreign currency price of sales to the US market tended to be higher than the foreign currency price of sales in foreign markets. Prices on the US market did not fall as much as Purchasing Power Parity (PPP) would predict in response to the dollar appreciation: instead exporters allowed the profit margin on sales to the US market to rise. This phenomenon, known as `pricing to market' (PTM), has been used subsequently to explain the slow response of the US current account deficit to the decline of the dollar. There is substantial empirical evidence which confirms the importance of PTM, but theoretical explanations of the phenomenon have proved more elusive. A number of dynamic models have been developed which exhibit pricing to market in the face of exchange rate changes. These models generally depend on dynamic costs of adjustment on the supply side, lags in the effects of price changes on demand, or lags in the adjustment of prices.
Drusilla Brown (Tufts University), in her paper `Market Structure, the Exchange Rate and Pricing Behaviour by Firms: Evidence from Computable General Equilibrium Trade Models', used a CGE trade model to demonstrate that an exchange rate change will have general equilibrium effects which, in the presence of tariffs or transportation costs, are likely to give rise to pricing to market. These general equilibrium effects arise through changes in the prices of primary factors and intermediate inputs and their effect on the cost of production. Brown's model assumed that the markets for certain goods are imperfectly competitive and internationally `segmented', and that firms behave in a Cournot fashion, using quantities as their strategic variable in each national market. Simulations of the CGE model revealed that a dollar appreciation of 10% lowers the price level in the US market by 2-3% and raises prices in the rest of the world by between 0 and 6%. This implies that US prices rise relative to world prices, when measured in a common currency, and that significant deviations from PPP can occur as a result of exchange rate changes.
In a related paper, `The Relationship Between Exchange Rate Variability and Export Pricing: Examples from the US, Germany and Japan', Catherine Mann (World Bank) explored the effects of the trends and volatility in exchange rates on exporters and on export pricing strategies. Her analysis of data on the transaction prices for exports of five industrial products exported from the United States, Japan and West Germany revealed that while German exporters have been faced by relatively smaller trend movements and volatility in exchange rates than have US and Japanese exporters, they are actually rather sensitive to these factors in fixing their pricing strategies. US and Japanese exporters, on the other hand, appear to be fairly insensitive to both trend movements of the dollar and its volatility. Such observations reinforce Brown's conclusion that PPP is not robust with respect to exchange rate movements.
In `Trade and Competition Policies for Oligopolies', Simon Cowan (Nuffield College, Oxford) considered whether a country which has monopoly power in its export markets should exploit this power through an export cartel. Such cartels can be dangerous if collusion in export markets makes it easier for firms to exploit their monopoly power at home, but if all production is exported and there are no competing firms abroad then this argument against forming a cartel cannot be used. Cowan demonstrated, however, that even when there is no domestic market, a cartel is not necessarily optimal when there is a trade policy game between the two countries. In the absence of policy responses by importing countries, the government of the exporting country has an incentive to exploit its monopoly power by permitting exporters to form a cartel and by imposing export taxes on the cartel (in order to capture some of the exporters' monopoly profits). If, however, the importing nations retaliate by imposing tariffs, it may under some circumstances pay the exporting government to break up the cartel, in order to induce a more cooperative solution to the trade policy game. Cowan's analysis highlighted the importance of precommitment: the exporting government can obtain a better outcome in its policy game with the other government if it precommits itself not to exploit its exporters' monopoly power in the subsequent game in which it sets competition policy vis-à-vis its own exporters.
Richard Baldwin (Columbia University and NBER) and Harry Flam (Institute for International Economic Studies, Stockholm) analysed the impact of `Strategic Trade Policy in the Market for 30-40 Seat Aircraft'. This is apparently an ideal industry for applying the Brander and Spencer model, in which a government can use export subsidies and other policies to shift profits from foreign to domestic firms and thereby increase national welfare. There are three producers in this market, along with a potential fourth firm, which pulled out before the production stage. Baldwin and Flam evaluated the impact of two trade policy interventions: (alleged) restrictions on access to the Canadian market and an (alleged) export subsidy by the Brazilian government. The results reported in the paper suggest that both policies increase welfare in the country imposing them, allowing its firms not only to capture a larger share of world profits, but also to reduce production costs by expanding domestic output. Moreover, it is even possible that other countries might benefit as well. The higher levels of output might increase the rate at which a relatively efficient firm learns by doing and so reduce its production costs by enough to offset the policy's anti-competitive effects on world welfare. Discussion of the paper noted the inevitable crudeness of the data on which it was based and was careful not to draw firm policy conclusions from it; nonetheless Baldwin and Flam's analysis offers an elegant illustration of the potential for `profit-shifting policies'.
In `Procedural Protectionism: The American Trade Bill and the New Interventionist Mode', Earl Grinols (University of Illinois) described the changes in US trade law introduced by the Omnibus Trade Act of 1988. He predicted that by changing the procedures for hearing trade cases, the new law will increase trade barriers by making it easier for US firms to obtain protection. This is particularly true of the clauses in the Act involving unfair trade practices, but also affects the escape clause and the provisions for anti-dumping and countervailing duties. Grinols noted that increased `procedural protection' of this sort offsets the movements towards freer trade through tariff and quota liberalization. The discussion of Grinols's paper recognized the dangers inherent in the new Bill, although it was also noted that tougher and more explicit US responses to other countries' policies could have the effect of reducing the degree of subsidy and dumping pursued elsewhere.
The paper by Jean Waelbroeck (Université Libre de Bruxelles) studied `A Game-Theoretic Analysis of Trade Negotiations'. He argued that international cooperation in trade needs to be sustained by credible commitments to good behaviour by each country, and that selfish national optimization cannot sustain a welfare-maximizing equilibrium. Waelbroeck also argued that continued exemption of the newly industrializing countries (NICs) from the rules of the GATT is a dangerous source of trade tension and could lead to a serious breakdown of GATT rules.
In `The Transient Nature of New Protectionism: The Case of International Trade in Footwear', Carl Ham ilton (Institute of International Economic Studies, Stockholm) considered the footwear sector as an example of a declining sector which has benefited from sporadic protection. He noted that in the major European and American economies, levels of protection for footwear were low in the period 1970-7, rose significantly through the introduction of non-tariff measures between 1978 and 1982, only to fade away again through the 1980s. Hamilton considered whether political economy models of protectionism could explain why the protection enjoyed by the footwear sector was sporadic while in the clothing industry protection has been permanent and increasingly tight. A number of the participants suggested that economic size was an obvious explanation: footwear is usually only 20% of the size of the clothing sector. Hamilton suggested some other explanations. First, the US's `Orderly Market Agreements' with Taiwan and South Korea from 1977 to 1981 triggered a wave of protectionism in Europe and Canada, but when the US agreements expired in 1981, protection in Europe also moderated. Hamilton christened this the `domino effect', and argued that US protectionism undermined the resistance to protection in other capitals. The rapid disappearance of protection in the footwear industry could also be explained by the ease with which its workers found new jobs as well as by the persistently high profit levels enjoyed by the industry, especially by US and European producers who became footwear importers.
In `Coalitions in the Uruguay Round: The Extent, Pros and Cons of Developing Country Participation', Coleen Hamilton and John Whalley (University of Western Ontario) described the coalitions of developing countries which have formed in the current GATT Uruguay Round. They reported that while they have made several proposals about agenda, coalitions have not yet negotiated the exchanges of concessions necessary to effect any bargains. Hamilton and Whalley expressed doubts about whether coalitions would ever be able to negotiate successfully they may find it difficult to achieve exchanges because they require internal agreement both on requests and on offers. Nonetheless coalitions of larger developing and smaller industrial countries have been crucial for the progress achieved to date in the Round, both in terms of defining issues and maintaining the momentum of the talks.
Current anti-dumping laws even those that are consistent with the GATT, such as the EC's have a strong protectionist impact, according to Patrick Messerlin (Université de Paris and World Bank). In his paper, `The EC Antidumping Regulations: A First Economic Appraisal, 1980-85', Messerlin showed that anti-dumping actions result in a substantial reduction in the volume of imports (40% on average). The measures also lead to significant trade diversion, especially when applied to NICs and developing countries. Messerlin noted that even in cases where investigations subsequently find no evidence of dumping, imports fall: exporters are presumably intimidated into curtailing trade by the threats implicit in the legal action. Anti-dumping laws also induce collusion among domestic firms and between them and the foreign firms by encouraging trade restrictions, especially price-fixing arrangements. The effects of collusion are in addition to those of the average 23% duty imposed when dumping is believed to have been found. Messerlin also noted evidence from other studies, which suggests that EC procedures are biased towards finding the existence of dumping and of high dumping margins. Messerlin concluded that, overall, anti-dumping laws impose significant costs on consumers and undermine some of the basic principles of the GATT. Coupled with Grinols's analysis, these results show the insidious effects of `legalized protection'.

Edward Ray (Ohio State University) analysed the impact on the major debtor countries of the US Generalized System of Preferences (GSP) trade preferences available to developing countries on US manufactured imports. In `Impact of Rent Seeking Activity on US Preferential Trade and World Debt', Ray examined the behaviour of manufactured exports to the United States during 1985 and 1986 from Argentina, Brazil, Indonesia, South Korea, Mexico, the Philippines and Venezuela. His analysis indicated that the GSP had negligible, even perverse (i.e. negative), effects on US imports from these countries. Ray attributed this to the ability of US special interest groups to prevent significant preferences from being granted on their products. These are typically the products that are most important to the development of middle-income countries, such as footwear and light engineering goods. While the GSP is not intended as a tool of debt policy, Ray's findings do not offer much encouragement for the eventual solution of the major debtors' problems, and they certainly suggest that negotiations over debt should not be linked to preferential trading arrangements

Revised versions of the papers presented at ISIT will be published in a special issue of Weltwirtschaftliches Archiv, edited by Robert Baldwin and L Alan Winters and available next year.