The Substitution Problem in the Theory of Effective Protection

Input substitution theoretically invalidates the resource flow predictions of effective rates of protection calculated in a partial equilibrium framework. Partial equilibrium effective protection analysis, despite this "substitution problem," has nevertheless quietly settled into the trade economist's toolbox. This paper presents a new, transparent review of the substitution problem in effective protection. It finds that partial equilibrium effective protection analysis, although theoretically susceptible to misleading results, is in practice a reasonable estimator of certain short-run general equilibrium effects of protection