Empirical Analysis of the Welfare Effects of Commercial Policy

Abstract

Empirical work on the welfare effects of commercial policy has proliferated in the last two decades. This is due to ‘innovations’ in trade theory, empirical methodology and in commercial policy instruments. Theoretical developments in the area of international trade and trade policy have widened our perspective as to the nature of the potential costs and benefits of trade policy interventions. In the context of the traditional models of trade we tend to focus on the static production, consumption and terms of trade effects of trade barriers. The new theories of trade under imperfectly competitive conditions have highlighted other possible impacts on economic welfare: changes in costs of production resulting from scale or learning effects, changes in consumer choice associated with imports of differing variety or higher quality goods, or changes in market structures. Similarly, greater awareness of second-best theory has resulted in increased attention being given to the welfare effects of market distortions and externalities (private costs being likely to give distorted measures of the social opportunity costs of resources). Empirical innovations, although often lagging behind theoretical developments, have also taken place in the case of commercial policy evaluation.