Trade Policy Transparency and Investor Confidence: Some Implications for an Effective Trade Policy Review Mechanism

This paper is concerned with the value of the WTO’s Trade Policy Review Mechanism, particularly its transparency role and its potential role in policy stability, for investor confidence in developing countries. The implications of reduced risk and uncertainty regarding trade policy for investor confidence, and ultimately for the capital stock and the long‐run structure of production, are examined in an analytical model. Certainty equivalence is employed to assess the general equilibrium effects of risk and uncertainty. Their reduction can boost risk‐adjusted returns, leading to an increase in long‐run levels of capital.