International trade is one of the oldest subfields of economics. The practice of international trade dates back to the dawn of civilization and the formal theoretical analysis of these trading activities originates with the writings of David Hume, Adam Smith, and David Ricardo. The stated objective of this book – written by one of the most influential trade theorists of his generation – is to convey the most important insights from the scholarly trade literature of the last 200 years to a broad audience, including ‘policy makers, political scientists, other people with no scientific background who follow world affairs … [and] … undergraduate and graduate students of economics and other professional economists’. Given the complexity of the subject matter, this has been a challenging objective. Elhanan Helpman is to be commended for the treatment of trade theory and empirical evidence using only prose, illustrative tables, and graphs. However, since the book emphasizes economic models, it will be most appreciated by readers with some background and appreciation of economic modelling. For these readers, this book provides a thorough treatment of the evolution of theoretical thought and its empirical evidence.

The book contains a brief introduction, five core chapters, and an epilogue. The core chapters are all organized around the interplay between a theoretical framework and the empirical relevance or evidence. The book begins with a brief discussion of the historical developments of international trade over the last millennium. A few charts illustrate the rise and fall of the colonial trading powers between the sixteenth and eighteenth centuries and then the rise and fall of world trade following the Napoleonic Wars. It emphasizes that the industrial revolution induced expansion of economic activity, resulting in an important shift in the nature of trade from non-competing to basic goods. This sets the foundation for the remainder of the book which discusses the theoretical causes and implications of international trade.

The first two core chapters highlight the fundamental insights of comparative trade theory, which has been ‘a pillar’ of the field of international trade since 1817 and ‘the pillar’ until the late 1970s. Using a two-country, four industry example as an organizing device, Chapter 2 guides the reader through the key insights from the two sub-theories of comparative advantage, which emphasize differences in countries' technologies (Ricardian model) and factor proportions (Heckscher–Ohlin) as determinants of international trade. A fundamental message of the Ricardian model is that wages in different countries are determined jointly with the pattern of international specialization. Two examples illustrate how the Ricardian model can be used as a device for formulating powerful and sometimes surprising predictions. For example, an increase in the foreign labour force will drive up domestic wages. The discussion of the Ricardian model concludes with an empirical application that provides a taste of how this model has been used to quantify counterfactual policy experiments on the world economy. The follow-up section on the Heckscher–Ohlin model summarizes half a century of key theoretical insights and empirical research aimed at matching the model with the data.

Chapter 3, which is a bit awkwardly entitled, ‘gainers and losers’, discusses the welfare effects of trade, both at the aggregate level and for individual groups within the economy. In demonstrating that international trade must lead to economy-wide gains at the aggregate level, Helpman is careful to point out the argument is both deep and subtle, and closely related to the question of whether the market mechanism allocates resources in the right direction. Since the gains-from-trade argument involves a comparison of the same economy with and without international trade, a situation rarely observed, he discusses two cases in economic history that allow for such a comparison. The second part of the chapter discusses the welfare effects of trade within an economy, showing that trade will create economic winners and losers. This rationalizes protection-seeking in import-competing sectors. The chapter concludes by illustrating that although the losers could be compensated by the winners, the political implementations of this compensation are limited.

Chapter 4 introduces the Nobel Prize winning insights of the monopolistic competition trade model which emerged in the late 1970s. Motivated by the observation that the majority of trade occurs between economies that are quite similar in their factor endowments, the new trade theory rationalizes trade between economies with identical technologies and factor endowments. In this model, the interaction between scale economies and product differentiation provides not only a new cause of international trade, but also new insights about the pattern and gains from trade. While in comparative advantage trade theory, the pattern of specialization is caused by countries' fundamental characteristics, economies of scale introduce some arbitrariness in the pattern of specialization. If there are several sectors and trade liberalization results in a contraction of the economy's increasing returns to scale sector, trade can actually reduce national welfare. However, the presence of product differentiation coupled with the assumption that consumers value more variety allows the model to illuminate a new source of gains from trade: increases in variety.

The conceptualization of the market structure of monopolistic competition goes back to a seminal 1933 book by Edward Chamberlin. The author provides a nice intuitive discussion of Chamberlin's equilibrium concept which Helpman himself, in collaboration with Paul Krugman, integrated into the canon of modern trade theory. Following the discussion of the theory, Helpman examines the two key theoretical predictions of the model and their empirical implementations. Helpman's own work launched an empirical inquiry into the model's prediction on bilateral trade flows, which is well-supported by the data. The second prediction, first articulated by Krugman, formalizes the notion that economies tend to specialize and export those products for which they have a relatively large home market demand, the so-called home market effect. The empirical literature in search of the home market effect is quite intricate and Helpman provides a good guide to the main empirical approaches.

Chapter 5 is about firm heterogeneity. Starting in the mid 1990s, the systematic econometric exploration of disaggregated plant-level data has revealed patterns on firm's differential engagement in export activities. This provided motivation for the emergence of the firm heterogeneity literature, launched in a seminal paper by Marc Melitz (Reference Melitz2003). After discussing the key empirical regularities that exporting firms tend to be bigger and more productive than non-exporting firms, Helpman sketches the main elements of the Melitz model and its implications. This model stresses the role of export costs as a rationale for why only relatively more productive firms engage in exporting. In addition, the model suggests a new channel for the gains from trade: an increase in aggregate industry productivity arising from the exit of less productive firms. The last section of this chapter concludes with a discussion of unemployment and inequality that arises from incomplete matching between employers and employees in a global context. This section portrays a bit of a skewed view of the literature since many of the issues raised have been investigated by others outside the heterogeneous firm framework. Unfortunately, there is only a limited discussion of their work.

The final core chapter addresses offshoring and outsourcing. Since this is a complex phenomenon, there does not exist one core model, and Chapter 6 discusses the different angles the academic literature has taken on the subject. The book concludes with a brief evaluation of recent work on multi-product firms and trade in quality differentiated products.

Overall, the book provides a valuable non-technical introduction to the different analytical approaches in the field. A shortcoming is that the surveyed models are all static, whereas the process of globalization is intrinsically dynamic. Helpman acknowledges this, but refers the reader to his earlier book on the Mystery of Economic Growth (Helpman, Reference Helpman2004) with the qualifier ‘that there is not much new that can be added to that treatment’. This is a pity, since there is some important recent work on the dynamic aspects of trade, such as the product cycle theory of trade, as well as institutional dynamics and trade that would have deserved their own chapter.