2142. Adjusting to Trade Policy Reform

Steven J. Matusz and David Tarr
(July 1999)

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 a larger effort in the group to examine how trade liberalization affects growth and poverty reduction. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Lili Tabada, room MC3-333, telephone 202-473-6896, fax 202-522-1159, Internet address ltabada @worldbank.org. David Tarr may be contacted at dtarr @worldbank.org. (58 pages)

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