Introduction

Why should we bother about making computable general equilibrium (CGE) trade policy models dynamic? After all, the theory of commercial policy is largely static in nature, focusing on the welfare consequences of production and consumption distortions attendant upon various trade policy measures. These concerns, one might argue, are adequately captured in static CGE models and, therefore, little can be gained by imposing dynamic machinery on our CGE models, which are sometimes quite hard to digest anyway.

Our response to this question is that any treatment of trade liberalization on the basis of static theory potentially misses an important part of the story. Suppose we know that the static efficiency gains of some proposed measure of trade liberalization (or integration) amount to a 2 percent increase of gross domestic product (GDP). Should we conclude that welfare of all individuals will increase by this percentage amount? Trade theorists are quick to point out that we should not. For one thing, there may be consumption gains in addition to production gains, ultimately leading to a larger than 2 percent equivalent income variation. Moreover, depending on their factor ownership position, individuals may be affected in perhaps dramatically different ways by the policy shift in question. In other words, efficiency gains are likely to have distributional implications which should not be ignored in careful policy evaluation. These are the concerns that static CGE models are geared to capture in a rigorous way, and they are addressed in other chapters of this book.