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Adjusting to trade policy reform

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  • Matusz, Steven J.
  • Tarr, David

Abstract

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: 1) Developing countries tend to have comparative advantage in labor-intensive industries, and trade liberalization tends to favor labor. 2) Inter-industry shifts occur after trade liberalization, which minimizes the dislocation of factors of production. 3) In many industries, normal labor turnover exceeds dislocation from trade liberalization, so downsizing, when necessary can be accomplished without much forced unemployment. The authors recommend a uniform tariff to minimize special-interest lobbying for protection since it diffuses the benefits of protection.

Suggested Citation

  • Matusz, Steven J. & Tarr, David, 1999. "Adjusting to trade policy reform," Policy Research Working Paper Series 2142, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2142
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    More about this item

    Keywords

    Decentralization; Economic Theory&Research; Environmental Economics&Policies; Labor Policies; Public Health Promotion; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Health Monitoring&Evaluation; Trade Policy; Economic Theory&Research;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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