Adjusting To Trade Liberalization

This publication identifies tools at the disposal of governments to smooth adjustment, to minimize an economy's adjustment costs and to alleviate the burden of those who suffer most.--Publisher's description.

A survey of more than 50 empirical papers shows that the adjustment costs of trade liberalization are small relative to the benefits. Moreover, manufacturing employment typically increases with trade liberalization. The limited data suggests that trade liberalization reduces poverty.

A survey of more than 50 empirical papers shows that the adjustment costs of trade liberalization are small relative to the benefits. Moreover, manufacturing employment typically increases with trade liberalization. The limited data suggest that trade liberalization reduces poverty.Virtually all of the studies that quantify the adjustment costs of trade liberalization relative to the benefits point to the conclusion that adjustment costs are small in relation to the benefits of trade liberalization.The explanation for low adjustment costs is that: These costs are typically short term and end when workers find a job, but the benefits grow as the economy does. Unemployment doesn't last long, especially where workers' pay was not substantial in the original job. Normal labor turnover often exceeds job displacement from trade liberalization.Moreover, studies that examine the impact of trade liberalization on employment in developing countries find there is little decline - and usually an increase - in manufacturing employment in developing countries a year after trade liberalization, for three reasons: Developing countries tend to have comparative advantage in labor-intensive industries, and trade liberalization tends to favor labor. Interindustry shifts occur after trade liberalization, which minimizes the dislocation of factors of production. In many industries normal labor turnover exceeds dislocation from trade liberalization, so downsizing, when necessary, can be accomplished without much forced unemployment. Matusz and Tarr recommend a uniform tariff to minimize special-interest lobbying for protection since it diffuses the benefits of protection.This paper - a product of Trade, Development Research Group - is part of larger effort in the group to examine how trade liberalization affects growth and poverty reduction. David Tarr may be contacted at dtarr @worldbank.org.

Output among firms is likely to be reallocated as a result of trade liberalization. In imperfectly competitive industries, such a "rationalization" effect can be an important component of the welfare impact of trade reform.

This paper examines the appropriate time path of the tariff rate for a small open economy that has decided to move from protection of import competing industries to free trade. Adjustment costs for moving resources to alternative uses do not provide a rationale for gradual adjustment of the tariff rate because in the absence of distortions, rational optimizing agents will make socially appropriate investment decisions with respect to adjustment when they are qiven correct price signals. Some distortions of the adjustment process imply the desirability of gradual adjustment of the tariff rate to slow adjustment, but other distortions imply the desirability of subsidizing imports in the short run in order to speed movement of resources out of previously protected industries. Concern with the income redistribution effects of reductions in the tariff rate(which usually injure owners of factors in previously protected industries) does provide a general rationale for a gradual move to free trade. The influence of the unemployment consequences of tariff reduction on the appropriate path of commercial policy depends on the nature and shape of the respone of the rate of resource reallocation to the level of unemployment in previously protected industries.

While trade integration has been an engine of global growth and prosperity, as suggested by theory, some sectors have been negatively affected by increased import competition. We test if this negative effect is significant in a context of high intranational migration, as theory indicates that labor mobility could reduce it. We focus on the 2004-14 period of trade liberalization in Peru (a major beneficiary of trade integration), which allows for methodological improvements relative to similar studies. We find that districts competing with liberalized imports experienced significantly lower growth in consumption per capita despite some emigration in response to increased import competition. This underscores the need to support the “losers of trade liberalization” even amidst high labor mobility.

The period of transition from socialism to capitalism in parts of Europe and Asia over the past 25 years has attracted considerable interest in academia and beyond. From the Editors of Palgrave's iconic series 'Studies in Economic Transition' comes the Palgrave Dictionary of Emerging Markets and Transition Economics. This dictionary addresses the needs of students, lecturers and the interested general public to quickly find definitions and explanations of topics, institutions, personalities and processes in this historical phase of changing societies, which as such is not concluded. Today newly emerging market economies try to learn from the experiences of transition economies. Those who love The New Palgrave Dictionary of Economics will enjoy the format of this Dictionary, which uses an encyclopaedia-based approach, where articles not only define the terms but provide an overview of the evolution of the term or theory and also touch on the current debates.

This book gauges possible development implications of current WTO trade negotiations by examining various proposals and assessing their likely economic impact. The experiences of a number of countries at different levels of development and across various regions are examined to ascertain the impact of their trade reforms.