Because workers are also consumers, trade brings them immediate gains through cheaper imports, and it enables most workers to become more productive as the goods they produce increase in value
Toys from China, copper from Chile, rice from Thailand---trade in goods and increasingly in services is the most important and most stable form of economic contact with the rest of the world. It also promises great opportunities for lowering consumption and investment costs and speeding the growth of output and wages. But countries must undergo considerable and often painful adjustments before reaping these rewards, especially if their economies have been heavily protected. Changes in the pattern of trade bring about social transformations, hurting those workers who lack the flexibility or the skills to leave decaying sectors previously propped up by trade barriers.
So there are also reasons to worry---despite the promise of the Uruguay Round agreement and the proliferation of regional free trade accords. To reap the gains that freer trade offers, policy frameworks, both national and international, must be supportive of change.*
Exports mean higher wages One statistic makes the case powerfully for an export-led strategy: during the past two decades real wages rose at an average annual rate of 3% in those developing countries where the growth of exports as a share of GNP was above the median, but wages stagnated in those where exports expanded least. This does not necessarily mean that increased exports are a sufficient condition for faster economic growth, but it does suggest that they are part of the story. Trade helps workers in two ways:
Trade brings mutual gains to all countries, but it can also have important distributional effects within national boundaries, benefiting some workers whose products become more in demand and hurting others who lose out to new competitors. Trade with poorer countries might hurt unskilled workers in industrial countries, although most economists believe that it explains only a relatively small part of their labor market difficulties (see box). It has also hurt those workers in developing and formerly centrally planned economies hit hard by the demise of previously protected sectors. But since society as a whole gains, the challenge for policymakers is to ease the transition to free trade by encouraging the labor force to upgrade its skills by compensating the losers---and to avoid protection, which only makes the national pie smaller.
Increased openness to trade has been strongly associated with the reduction of poverty in most developing countries. In Morocco, for example, the incidence of poverty fell by half, from 26% to 13% of the population, in just five years after trade was liberalized in the mid-1980s. New jobs---most of them connected to a booming garment manufacturing sector geared to the European market---drew unskilled workers from rural areas to the cities. Export-led growth has also been associated with poverty reduction in East Asia, Chile, Mauritius, and Turkey.
The impact of increased trade on income distribution in developing countries has been much more varied than the impact on poverty. In Morocco trade was equalizing. In East Asia, too, income distribution became more equal as trade expanded. But in some Latin American countries, such as Chile and Mexico, a more recent wave of trade liberalization has coincided with increased wage and income inequalities. In Mexico's maquiladora enterprises the ratio of nonproduction (white-collar) to production wages rose from 2 to 2.5 between 1985 and 1988. And in Chile the wages of university graduates rose by 56% relative to those of high school graduates between 1980 and 1990. These trends may be linked to the introduction of new labor-saving technologies, particularly the computer revolution, which have increased inequality in industrial countries. Other factors could also explain the phenomenon. Well-trained white-collar workers are often scarce immediately after liberalization. Some industries previously protected were themselves labor-intensive. Some activities moving from industrial to developing countries along with capital are skill-intensive by developing countries' standards. And in some middle-income countries unskilled workers face greater competition from workers in poorer countries.
So, trade benefits most workers but not all. As trade becomes increasingly open, the poor in developing countries benefit because the demand for their labor goes up. Skilled workers in industrial economies also gain because the demand for their skills rises. But the welfare of unskilled workers in rich and middle-income countries can fall.
Competition by low-cost producers should boost welfare by encouraging labor in richer countries to shift from low-productivity to high-productivity activities. But these gains cannot be realized if workers remain unemployed. Policies to compensate those hurt by change and help them shift to new occupations are essential so that trade can deliver higher incomes for all, and protectionism can be defeated.
* For more details, see World Bank, World Development Report 1995: Workers in an Integrating World, New York: Oxford University Press, 1995.