“Trade policy analysis has experienced major changes over the last decade on both the theoretical and empirical fronts. The “new” trade theory points out that the presence of imperfect competition in a market renders theoretically ambiguous the magnitude and the direction of trade policy effects, particularly on resource allocation, factor payments and welfare. On the empirical front, the computable general equilibrium model (CGEM) has emerged as a leading tool for empirical analysis of trade policy. In this paper, the convergence of these two developments are explored – CGEM’s with imperfect competition and their applicability to developing countries. For these countries, the principal application of this theory is in the study of the impact of trade policy when domestic markets behave in a non-competitive way. In the final section, the ambiguous effect of trade policy is illustrated with a series of simple CGEM’s with and without imperfect competition and scale economies.”
