New Trade Theory:

In general,  this has led  to a  body of  literature known as  the 'New Trade Theory', which  is based on four  innovations that have  in recent years modified  the reigning neoclassical economics:

• An appreciation of market imperfections.
• The new industrial economics of strategic behaviuor.
• New Growth  Theory, a fresh approach  to  the question of economic growth.
• A changing appreciation of the political context.

Much of New Trade Theory is simply the application of the well-established economic principle the Theory of the Second-Best. This holds  that even if perfectly free markets are best in an ideal world, the minute you introduce  one market imperfection,  subsequent imperfections may in fact be better  than pure free-market policies, as they may just cancel out previous imperfections and push the market back  towards eficiency, not away fiom it.  So  if we don't have perfectly free domestic markets, due to  imperfect competition, government regulation and other  factors,  then perfectly free markets in foreign  trade are  not necessarily optimal. For example, if US exports are subsidised by the global US security apparatus,  it should be taxed to balance  this subsidy or the market will produce too much of it.