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Handbook on International Trade Policy

Handbook on International Trade Policy

Elgar original reference

Edited by William A. Kerr and James D. Gaisford

The Handbook on International Trade Policy is an insightful and comprehensive reference tool focusing on trade policy issues in the era of globalization. Each specially commissioned chapter deals with important international trade issues, discusses the current literature on the subject, and explores major controversies. The Handbook also directs the interested reader to further sources of information.

Chapter 25: Capitalization of Trade Policy Benefits

William A. Kerr

Subjects: economics and finance, international economics


25 Capitalization of trade policy benefits William A. Kerr Introduction When the partial equilibrium approach is used to evaluate trade policy measures, the analysis is often undertaken from a short-run perspective. For many of the questions for which answers are sought, the short-run perspective is sufficient. In other cases, however, if longer-run adjustments are not taken into account, important implications and complications are ignored. These long-run adjustments often lead to misestimates of the distortions arising from the imposition of trade barriers (Gaisford et al. 2003) and complicate negotiations to reduce or eliminate trade barriers that were imposed in the past and have remained in place over long periods (Gaisford and Kerr 2001). One of the most important of the latter long-run effects arising from the imposition of trade-distorting measures is the capitalization of trade policy benefits. What is capitalization? A vital insight that arises from approaching the examination of changes in a trade policy regime from a long-run perspective is that the benefits of policies will be capitalized into the value of relatively fixed assets. While it is often convenient to approach the analysis of trade policy from the starting position of competitive static long-run equilibrium, where all firms in the industry have the same cost structure, in fact industries are seldom at or near equilibrium due to differences in the abilities or predilections of firms to acquire or utilize new technologies (Grilliches 1957; Quan and Kerr 1983), lags in the exit process of...

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