Edited by William A. Kerr and James D. Gaisford
Chapter 25: Capitalization of Trade Policy Benefits
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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