Adjusting to Trade Policy Reform

60 Pages Posted: 20 Apr 2016

See all articles by Steven J. Matusz

Steven J. Matusz

Michigan State University - Department of Economics

David G. Tarr

International School of Economics at Tbilisi State University

Date Written: July 1, 1999

Abstract

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.

Suggested Citation

Matusz, Steven J. and Tarr, David G., Adjusting to Trade Policy Reform (July 1, 1999). Available at SSRN: https://ssrn.com/abstract=597268

Steven J. Matusz (Contact Author)

Michigan State University - Department of Economics ( email )

Department of Economics
486 West Circle Drive
East Lansing, MI 48824
United States
517-353-8719 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://econ.msu.edu/faculty/matusz/index.php

David G. Tarr

International School of Economics at Tbilisi State University ( email )

16 Zandukeli Street
Tbilisi, 0108
Georgia