New trade theory is an economic theory developed by economists in the 1970s that somewhat contradicted the arguments for unlimited free trade that were popular at the time. The model developed by these economists suggested that it might benefit countries with an advantage in producing certain goods to initially protect the trade of such goods. By doing so, the economic advantage for the producing company might be more greatly realized, especially in the future. In this way, the theory suggests that monopolies or oligopolies aren't necessarily a bad thing on the world market, either for businesses or consumers.
One of the founding principles of the free trade model is the perfect competition principle, which suggests that multiple producers of goods competing with each other ultimately reduce prices for consumers and that this situation is the most beneficial for the society at large. New trade theory flies in the face of this to some extent by accepting the fact that some countries have specific advantages in producing certain goods. It also takes into consideration some of the difficulties of the globalization of trade.
This theory isn't ultimately against global trade between countries. It simply suggests that those with a comparative advantage, in other words those who can produce more of a specific product at lower cost than their competitors, may exploit this advantage, dominate the market, and still eventually benefit the consumer. This advantage might come due to natural factors within a country such as climate or natural resources, or those countries might enjoy a labor advantage when producing a particular product.
In addition, new trade theory attempts to understand and explain the way that global trade affects the variety of goods available to consumers around the globe. Even though countries may have no particular disadvantage in producing a particular type of good, they may still import this good from another country. This, in turn, produces more variety for the individual consumer.
Even as the consumer enjoys greater variety, the process actually decreases the variety of goods around the world, as certain brand names become staples of the worldwide economy. For this reason, the practice of protecting infant industries as a way of making them more desirable is somewhat inimical to typical free trade theories. New trade theory also supposes an increasing scale of production, which is the model that states that as input factors increase, output levels actually increase at a higher level. This again is a determining factor in increasing variety for consumers throughout the world, even if it doesn't necessarily lower prices.
