Winners and loser of trade liberalization: frictions, rigidities and reforms
rade liberalization brings economic gains to the economy due to efficiency improvements and lower prices. The gains, however, may not be for everybody: export sectors win and import sectors lose. This creates a distributional conflict. The gains and losses from trade, and the attendant conflict, evolve as the economy adjusts. This depends on capital and labor market rigidities. There is room for policies to help realize and enhance the gains from trade and to mitigate the losses.
- Trade liberalization generates aggregate gains, but also creates winners and losers.
- Tariff cuts hurt workers in import-competing sectors and benefit workers in other sectors.
- The ensuing distributional conflict depends on the frictions that govern markets for labor, finance and raw materials.
- Rigidities in labor markets may prevent the gains from trade; labor reforms may enhance those gains.
- But labor frictions are protection devices too: rigidities protect winning workers in export sectors from the 0inflow of trade-displaced workers.
- Complementary labor market reforms that accompany trade liberalization need careful scrutiny.Supporting knowledge transfer could reduce the differences between leader and laggard companies.
Guido Porto, Professor of Economics at the Universidad Nacional de La Plata, Argentina, and Research Associate at African Center for Economic Transformation, ACET, Ghana,
r4d Trade and Labor Market Outcomes project websites:
PDF: r4d Policy Brief 2020, No. 1