The “new” trade theory and standard trade theory make
different predictions about the composition and distribution of trade
flows. Empirical evidence suggests that an increasing share of
international trade consists of differentiated products, a consequence
of increasing returns to scale. Nonetheless, the existing political
science literature typically assumes that the conditions of standard
theory hold. As such, the literature ignores the dynamic-inconsistency
problem that imperfect markets can create. In doing so, it also ignores
the fact that imperfect markets can shift the political prerequisites
of open international markets. In this article we examine these shifts.
We argue that alliances can support an optimal level of trade when
scale economies rather than differences in relative factor endowments
motivate it. Our empirical results support this argument, indicating
that alliances exert a stronger influence on trade in goods produced
under conditions of increasing rather than constant returns to
scale.Earlier versions of this article
were presented at the 2002 Annual Meeting of the American Political
Science Association, Boston; the 2002 Annual Convention of the
International Studies Association, New Orleans; and seminars at the
University of Chicago (PIPES), the University of Colorado, Cornell
University, Dartmouth College, New York University, the University of
Pennsylvania, and Yale University. For helpful comments and suggestions,
we are grateful to participants in these seminars and to Regina Baker,
Bruce Bueno de Mesquita, William Clark, Benjamin Cohen, Christina Davis,
Eric Fisher, Avery Goldstein, Stephen Kobrin, Lisa Martin, Patrick McDonald,
Helen Milner, Robert Powell, Dan Reiter, Anne Sartori, Branislav Slantchev,
and Beth Yarbrough. We are also grateful to Regina Baker and Patrick
McDonald for research assistance.