Introduction Nowadays, the traditionally established advantages of free trade seem to be accepted by all members of the World Trade Organisation promoting world-wide tariff reduction to increase global welfare. However, most nations do not practise this principle but use trade barriers to protect domestic industries. One current example is provided by the US government discussing drastic market protection for its steel industry - legally justified by section 201 of the Trade Act 1974 (see: The Times, 2001), however, fundamentally against the WTO's vision of free trade.
The observation of such and other real-world phenomena as well as changing economic theory (see Krugman 1986, 5-10) recently resulted in new approaches to trade policy favouring government intervention into market structures.
The aim of this essay is to examine if these new theories provide a theoretical justification for protectionist trade policies.
Arguments for government intervention The contemporary approaches, so-called strategic trade theories mainly argue that "a government can enhance national welfare by promoting domestic development of industries that create substantial factor rents or external benefits" (Stegemann 1996, 83).
The concepts of rent and external economies were developed by Paul R. Krugman and, being the main strategic arguments, shall now be examined in detail (for the following see Krugman 1986, 12-14).
In the economic context rent is referred to as "payment to an input higher than what that input could earn in an alternative use" (Krugman 1986, 12) and means for instance exceptional high profits or wages in industries with ordinary levels of risk or skills required. According to the traditional trade theories, in perfectly competitive markets such deviations would rapidly be competed away by new market entrants. In reality, however, markets are imperfect and certain circumstances like important advantages from economies of scale or industry experience might impede market entry and therefore preserve...