## 041017joint-wto-wb-imf-trade-paper ## Source details **Canonical URL:** [041017joint-wto-wb-imf-trade-paper](https://www.imf.org/-/media/files/publications/pp/041017joint-wto-wb-imf-trade-paper.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/041017joint-wto-wb-imf-trade-paper.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/041017joint-wto-wb-imf-trade-paper.pdf.json) --- ### Executive summary — key findings and policy implications - Role and recent trajectory of trade - Trade integration helped drive economic growth in advanced and developing economies in the latter part of the 20th century. - Since the early 2000’s there has been: a slowdown in the pace of trade reform, a post-crisis uptick in protectionism, and risk of further reversals—these have been a drag on trade, productivity, and income growth. - Distributional effects and public support - Trade has left many individuals and communities behind, notably in advanced economies. - Job losses in certain sectors or regions in advanced economies have resulted to a large extent from technological changes rather than from trade, but trade-related adjustment can be concentrated, harsh, and prolonged in the absence of supporting policies. - Public skepticism about trade has risen, prompting calls (G20 Hangzhou, September 2016) for domestic policies to share gains from trade more widely and for better communication of its benefits. - Benefits of trade - Trade openness, supported by expansion of the multilateral trading system, has delivered higher productivity, greater competition, lower prices, and improved living standards. - Trade is estimated to have reduced by two-thirds (one quarter) the price of the household consumption basket of a typical advanced economy low-income (high income) household. - Costs and adjustment - Import competition has had harsh impacts on manufacturing jobs in certain locations in Europe and the United States when not accompanied by policies to support adjustment. - Dislocations depend on the size and abruptness of trade shocks and on broader circumstances such as: health of the economy, labor market rigidities, impediments to resource reallocation, and adequacy of social protection policies. - Policy responses (summary) - Ease worker mobility across firms, industries, and regions. - Active labor market policies (job search assistance, training programs, and in some situations wage insurance). - Social safety nets like unemployment insurance and other “passive” labor market policies. - Better-targeted and adequately financed trade adjustment assistance programs. - Complementary education, housing, credit, and infrastructure policies. - Early and comprehensive action to avoid entrenched, harsher, and longer-lasting impacts. - Future trade reform and multilateralism - Further trade integration in agriculture, services, and digital trade important to reinvigorate global growth. - Bilateral and regional agreements can be important; innovations from these agreements should eventually be brought to the global level. - Sustaining the WTO—including its dispute settlement, transparency, and negotiating functions—is critical; flexible approaches (including plurilateral agreements, as appropriate) can help revive negotiating function. ### Long-term trends — trade, growth, and recent slowdown - Historical expansion - From 1960 to the eve of the global financial crisis (GFC) in 2007, global trade in goods and services grew at an average real rate of about 6 percent a year—about twice that of real GDP growth during the same period. - Reductions in trade costs facilitated expansion of global value chains (GVCs), a strong driver of productivity and manufacturing exports since the early 1990s. - Heterogeneity in gains - Cross-country evidence links greater trade openness to higher per capita income and links trade reform (proxied as reductions in tariffs) to higher rates of productivity and income growth. - Recent slowdown and contributing factors - Trade and output growth slowed after the GFC; trade has been unusually weak relative to past performance. - Recent analyses attribute the trade slowdown, in varying degrees, to: - changes in composition of economic activity away from import-intensive investment; - slowing pace of global value chain growth and trade liberalization; - an uptick in trade protectionism. - Recent trade growth has been some 1 to 2 percentage points a year less than would have been expected based on the historical relationship between trade and macroeconomic factors (IMF, 2016a). ### Trade composition, costs, and policy landscape - Country composition and sectors - Merchandise trade among AEs fell from about 70 percent in the early 1980s to less than 40 percent by the early 2010s. - Services comprise some two thirds of global GDP and employment, and a quarter of global trade (nearly half of global trade measured on a value-added basis). - Global commercial services imports grew at some 5 percent a year during 2010–15, compared to 1 percent growth for merchandise trade. - Trade costs - The costs of trading goods are estimated to range from 50 to 400 percent on a bilateral basis. - Trade costs tend to be higher for EMDEs (often double those of AEs) and for agricultural goods. - WTO Trade Facilitation Agreement (TFA), which entered into effect in February 2017, is expected to contribute greatly to further reductions in some types of trade costs. - Tariffs and NTMs - EMDEs cut tariffs considerably to averages below 15 percent; advanced economies cut average tariffs from around 6 percent to below 3 percent. - A large gap remains between the ceiling rates bound in the WTO and applied tariff rates. - G20 developing countries have nearly a 20 percentage point excess of bound over applied tariffs. - “Peak” tariff rates (above 15 percent) remain on 31 percent of agricultural tariffs of G20 developing countries and 11 percent of agricultural tariffs of G20 developed countries. - Advanced economies’ tariffs on finished agricultural goods average 9 percentage points above those on raw agricultural products. - NTMs are pervasive; regulatory NTMs (SPS, TBT) are more prevalent for agricultural trade and more common in AEs; quantity and price controls more prevalent among low-income countries. - Services trade restrictiveness - STRI index: values from 0 (completely open) to 1 (completely closed); rescaled STRI values range from 0 to 100, 100 being the most restrictive. - According to the OECD STRI (2016), professional and transport services are among the most protected industries in advanced as well as developing countries. - Since 2014, some reforms reducing service restrictions have been adopted in a few countries; some countries have adopted tighter restrictions on temporary movement of people (Mode 4) and on cross-border transfer of personal data. - Trade agreements - Number of agreements notified to the WTO rose from about 50 in 1990 to around 280 in 2015. - More than half of PTAs include “deep” provisions within and beyond current WTO mandate; a core subset of “WTO-X” provisions are included in one third of PTAs. - Evidence points to a strong link between trade agreements and exports, particularly for “deep” agreements with broad policy coverage. - Recent protectionist measures - The share of G20 imports affected by trade-restrictive measures put in place since the global financial crisis reached 6.5 percent as of November 2016. ### Evidence on productivity, consumers, and welfare - Increasing productivity - A 138-country study: a 1 percentage point increase in openness raised productivity by 1.23 percent in the long run. - Within that sample, an increase in openness from the twentieth percentile to the median value raises productivity by 160 percent. - Ahn and others (2016): a one percentage point reduction in tariffs on inputs used in a sector improves total factor productivity in that sector by 2 percent. - Canada–U.S. FTA evidence: increased Canadian labor productivity in most impacted export-oriented industries by 14 percent and in the most impacted import-competing industries by 15 percent. - Brazil’s 1988–90 trade reforms: total factor productivity growth increased by 6 percent. - Benefits for consumers - India’s trade liberalization estimated to have caused prices to fall by 18 percent. - Value to U.S. consumers of increase in import varieties between the 1970s and 2000s estimated at 2.6 percent of GDP. - U.S. 2009 tire tariffs: cost at least $900,000 for each job saved on an estimated annual basis and associated with three times as many job losses in other sectors. - Faijgelbaum and Khandelwal (2016): current levels of trade on prices have a pro-poor bias in all forty countries in their sample. - Comparative statics: completely eliminating trade estimated to reduce real income across a broad set of countries by an average of 4 to 40 percent, depending on model specifications. - Other social benefits - Trade can reduce within-sector wage discrimination (gender and race wage gaps documented to narrow in response to increased competition). - ILO evidence points to trade agreements with labor provisions promoting labor force participation, particularly for females. ### Trade and adjustment — labor-market impacts and frictions - Reallocation and adjustment costs - Trade is not a main factor behind increased inequality overall; technology has played a key role. - Adjustment costs can be large and long-lasting when impeded by mobility frictions and skill mismatches; costs are lower when growth is strong and labor markets function smoothly. - Expansion of capital- (labor-) intensive sectors tends to increase the relative return to capital (workers); trade-driven within-sector reallocation favors more productive firms and can raise the skill premium. - Major adjustment frictions (Annex D) - Skill mismatches: switching industries within manufacturing estimated to forego the equivalent of 2.76 times annual wage in lifetime income for some workers. - Geographic frictions: migration and relocation obstacles (example: China’s Hukou system reduced gains from trade markedly). - Policy distortions: rigid job protection can slow reallocation; inflexibility in Mexico’s labor market slowed labor reallocation so benefits were as much as 30 percent less than under a more flexible market. - Capital mobility: reallocation in Brazil would accelerate from 14 years to 4 years if capital were completely mobile. - Empirical consequences and magnitudes - Areas exposed to competition from Chinese manufactures saw significant and persistent losses in jobs and earnings, falling most heavily on low-skilled workers (Autor and others, 2016; Pierce and Schott, 2016a). - One study attributes to Chinese import competition: "some 17 percent (about 1 million) of total job losses in U.S. manufacturing during the period 1999–2011" and "1.4 million non-manufacturing jobs" (Acemoglu and others, 2016). - Long-term average earnings losses from displacements range from "7–16 percent". - Simulation exercises suggest adjustment frictions in AEs can lead to transition periods of up to 10 years and reduce the gains from trade by up to 30 percent. - Worker-level impacts and broader context - Displaced manufacturing workers tend to be older, less educated, and longer-tenured; they take longer to return to work, exacerbating losses. - Long spells of unemployment associated with trade shocks lead to worse health outcomes, higher mortality, and lower achievements by children of affected workers. - Bilateral trade relationships tell only a partial story; negative labor-market outcomes from trade with one partner may be offset by positive outcomes from trade with other countries. ### Policy responses — domestic labor-market and complementary policies - Priority policy areas - Improve labor mobility across firms, industries, and regions. - Active Labor Market Programs (ALMPs): job search assistance, training programs, wage insurance where appropriate, early personalized counseling. - Social safety nets and passive programs: unemployment insurance, means-tested income support, health insurance. - Complementary policies: macroeconomic stabilization, housing, credit, education, regional policies, and competitiveness measures. - Trade-specific assistance: well-targeted and adequately financed trade adjustment assistance (examples: U.S. TAA and EU EGAF). - Evidence on ALMPs and program design - Track record of ALMPs has been mixed; randomized trials and evaluations show substantial variation in impacts. - Early and frequent engagement ("activation strategies") increases re-employment rates, especially for hard-to-place and long-term unemployed. - Training programs more effective when close to regular jobs and tied to private sector needs; on-the-job training often more effective than classroom training. - Job search assistance low cost but insufficient alone for structural unemployment caused by trade shocks. - Wage subsidies/insurance and reemployment bonuses have mixed evidence; careful targeting needed to avoid moral hazard and displacement effects. - Nordic countries have expansive coverage; Japan and the United States spent "less than 1 percent of GDP" on both active and passive programs (2013 data). - Passive programs and social insurance - Unemployment benefits can complement ALMPs by smoothing consumption and enabling training and job search. - Employment protection and minimum wage policies should be balanced with activation and unemployment insurance; overly high minimum wage combined with high payroll taxes can hinder employment prospects. - Disability and retirement insurance are increasingly used by displaced workers; Autor and others (2013) estimate these comprised "some 30 percent" of total transfers to workers displaced by China’s import penetration. - Country experiences (Annex E highlights) - Denmark: flexicurity model combining flexibility, generous unemployment benefits, and strong activation; high ALMP spending and effective early intervention, but coverage gaps for low-wage and low-skilled workers. - United States: TAA program certified about 120,000 displaced workers at a nominal annual cost of about $800 million; TAA features extended unemployment compensation (up to 24 additional months), relocation assistance (covers 90 percent of costs up to $1250), wage insurance for some reemployed workers (up to $10,000 a year), and a health insurance tax credit covering up to 72.5 percent of premiums. - EMDEs: larger informal sectors, lower education levels, weaker institutions complicate mitigation; lower funding and weaker ALMP performance are common challenges. - Design considerations - No one-size-fits-all: policy design and sequencing should account for factor market flexibility, education access, financial market depth, social safety net coverage, and degree of informality. - Early, comprehensive, and well-resourced interventions are emphasized to prevent entrenched harms and maintain public support for trade. ### Trade policy, WTO, and multilateral agenda - Trade reform agenda and distortions - Despite steps like TFA entry into force (February 2017), tariffs, subsidies, and services restrictions continue to weigh on trade. - Further cuts to MFN bound and applied rates would promote policy certainty and help resolve a patchwork of tariff preferences and rules of origin. - Further disciplining NTMs, including agricultural subsidies, would help level the global trading environment. - Frontier areas: services, digital trade, value chains - Services account for two-thirds of global GDP and employment; further opening international services flows and addressing digital trade commitments can expand trade and growth. - Integrated global production requires coherent reforms across trade, investment, and regulatory systems. - WTO roles and negotiating approaches - A strong WTO—with dispute settlement, transparency, and negotiating functions—remains central; RTAs and plurilateral approaches can lead on frontier issues but cannot fully substitute for WTO’s near-universal membership and institutional framework. - Plurilateral and "critical mass" approaches (example: ITA expansion) and the TFA’s differentiated implementation are cited as effective negotiation modalities. - Policy priorities and cooperation - Avoid increases in trade restrictions and roll back measures introduced since the global financial crisis. - Use multilateral negotiation where possible to address inherently global issues (farm subsidies, digital trade). - International cooperation (G-20, IMF, OECD) on macroeconomic policy and sectoral challenges (e.g., steel excess capacity) can minimize global disruptions and aid adjustment. ### Annex synopses (selected) - Annex A: Trade, growth, and poverty in developing countries - Openness associated with accelerated growth in average incomes; growth linked to poverty reduction. Example: income growth of bottom 20 percent increases almost 1 for 1 with average income growth. - Annex B: Impact of trade agreements on exports - Meta-analysis finds FTAs increase bilateral trade by around 40 percent; Baier and Bergstrand find around 100 percent increase in the long run using IV approaches. - Synthetic control on 104 country pairs: average gross exports of countries with trade agreements is 80 percentage points higher over the next ten years; translates into boost in annual export growth of 3.8 percentage points. - Annex C: Effect of trade on real incomes (cross-country) - Frankel and Romer (1989) approach: a one-percentage-point increase in openness causes real income to be 2 to 3 percent higher (1985 data). - Reproductions (1990–2014) yield: a one-percentage-point increase in trade openness raises real per capita income by 2 to 6 percent; estimates around 4 to 5 percent since the early 1990s but fell to nearly 2 percent after the GFC. - Annex D: Identifying and quantifying adjustment frictions - Key frictions: skill mismatches, geographic frictions, policy distortions, capital mobility costs; distributional effects often larger for female, older, or less educated workers. - Annex E: Adjustment policies — country experience - EMDEs face higher informality, lower education (2010 average formal schooling: EMDEs 7 years vs advanced economies 11.3 years), weaker capacity, and lower funding for programs (Brazil spends 0.8 percent of GDP on labor market programs, one quarter to active programs). - Denmark’s flexicurity model and U.S. TAA and UI programs provide contrasting approaches and evidence on program design and financing. - U.S. UI: provides up to 26 weeks of benefits averaging half of past earnings; historically 40–50 percent of displaced workers receive these benefits; about 30 percent exhaust them. ### Key quantitative highlights (exact figures preserved) - Global trade growth (1960–2007): about 6 percent a year. - Recent trade growth gap: some 1 to 2 percentage points a year less than expected. - Services imports growth (2010–15): some 5 percent a year; merchandise trade growth: 1 percent. - Trade costs (bilateral): range from 50 to 400 percent. - EMDE average tariffs: below 15 percent; advanced economies average tariffs: below 3 percent (from around 6 percent). - G20 imports affected by post-GFC trade-restrictive measures: 6.5 percent as of November 2016. - Share of agricultural tariff peaks (>15 percent): 31 percent for G20 developing countries; 11 percent for G20 developed countries. - Productivity elasticity (Alcala and Ciccone, 2004): 1 percentage point increase in openness raises productivity by 1.23 percent. - Canada–U.S. FTA productivity increases: 14 percent (export-oriented industries) and 15 percent (import-competing industries). - India price fall from liberalization: 18 percent. - Value to U.S. consumers from import variety increase: 2.6 percent of GDP. - Estimated job losses attributed to Chinese import competition in U.S. manufacturing (1999–2011): "some 17 percent (about 1 million)"; associated non-manufacturing jobs: "1.4 million". - Long-term average earnings losses from displacements: "7–16 percent". - Simulation: adjustment frictions can reduce gains from trade by up to 30 percent and extend transition periods up to 10 years. - TAA nominal annual cost (U.S.): about $800 million; TAA certified about 120,000 displaced workers. - TAA relocation assistance: covers 90 percent of associated costs up to $1250. - TAA wage insurance: supplement equal to half the wage difference, up to $10,000 a year for up to two years; some 5 percent of eligible participants enrolled. - U.S. UI duration: up to 26 weeks; historically 40–50 percent of displaced workers receive benefits; about 30 percent exhaust them. - Disability/retirement share of transfers in Autor and others (2013) composition: 31.9 (Disability/Retirement Insurance); UI/TAA benefits: 6.3; Income assistance: 26.1; Medical benefits: 31.6; Other: 4.1. - EMDE average formal schooling (2010): 7 years; advanced economies: 11.3 years. - Brazil labor market program spending: 0.8 percent of GDP (one quarter allocated to active programs). *Source: IMF, World Bank, and World Trade Organization joint paper (Executive Summary, Introduction, Sections II–VI excerpts, Annexes A–E).* ### References _____________________________________________________________________________________ 56 ### 041017joint-wto-wb-imf-trade-paper - References _____________________________________________________________________________________ 56 ### Executive summary — key findings and policy implications - Role and recent trajectory of trade - Trade integration helped drive economic growth in advanced and developing economies in the latter part of the 20th century. - Since the early 2000’s there has been: a slowdown in the pace of trade reform, a post-crisis uptick in protectionism, and risk of further reversals—these have been a drag on trade, productivity, and income growth. - Distributional effects and public support - Trade has left many individuals and communities behind, notably in advanced economies. - Job losses in certain sectors or regions in advanced economies have resulted to a large extent from technological changes rather than from trade, but trade-related adjustment can be concentrated, harsh, and prolonged in the absence of supporting policies. - Public skepticism about trade has risen, prompting calls (G20 Hangzhou, September 2016) for domestic policies to share gains from trade more widely and for better communication of its benefits. - Benefits of trade - Trade openness, supported by expansion of the multilateral trading system, has delivered higher productivity, greater competition, lower prices, and improved living standards. - Trade-related reallocation across sectors and firms and adoption of new technologies have generated productivity gains. - On consumption, open trade has led to wider choices and lower prices, benefiting especially lower-income households who consume a disproportionately higher share of tradeable goods and services. - Trade is estimated to have reduced by two-thirds (one quarter) the price of the household consumption basket of a typical advanced economy low-income (high income) household. - Recent research suggests trade has also helped advance certain other social objectives. - Costs and adjustment - Import competition has had harsh impacts on manufacturing jobs in certain locations in Europe and the United States when not accompanied by policies to support adjustment. - Dislocations depend on the size and abruptness of trade shocks and on broader circumstances such as: health of the economy, labor market rigidities, impediments to resource reallocation, and adequacy of social protection policies. - Policy responses - Domestic policies that ease worker mobility across firms, industries, and regions minimize adjustment costs and promote employment. - Active labor market policies (job search assistance, training programs, and in some situations wage insurance) can facilitate reemployment and augment worker skills. - Social safety nets like unemployment insurance and other “passive” labor market policies provide opportunities for retooling. - Trade adjustment assistance programs have had limited impact thus far but could take on a greater role if well targeted and adequately financed. - Complementary policies in education, housing, credit, and infrastructure are needed to facilitate mobility and revive hard-hit communities. - Early and comprehensive action is critical to avoid entrenched, harsher, and longer-lasting impacts. - Future trade reform and multilateralism - Further trade integration, including in agriculture, services, and digital trade, is important to reinvigorate global growth and advance an inclusive trading environment. - Bilateral and regional agreements can be important, but innovations from these agreements should eventually be brought to the global level. - Sustaining the WTO—including its dispute settlement, transparency, and negotiating functions—is critical; flexible approaches (including plurilateral agreements, as appropriate) can help revive negotiating function. - Strong, well-enforced trade rules discourage protectionism and reassure citizens that international trade is evenhanded. ### Introduction — framing and objectives - Longstanding tension: public skepticism toward “free trade” persists despite documented benefits; G20 Hangzhou leaders called for better communication of trade benefits and domestic policies to distribute those benefits more widely. - Paper’s framing (Sections referenced reflect paper structure): - Is open trade beneficial? (Section II and III): examines long-term trends and conceptual/empirical evidence that more open markets deliver opportunity and higher living standards. - Why is trade often unpopular? (Section IV): investigates how many individuals and communities have been left behind and why trade-related pressures can be conflated with technological change. - Domestic policies and trade policy role (Section V and VI): emphasizes early action on labor mobility, active labor market policies, social protection, education, housing, credit, and the role of trade policy and the WTO in promoting inclusive growth. ### Long-term trends — trade, growth, and recent slowdown - Historical expansion - From 1960 to the eve of the global financial crisis (GFC) in 2007, global trade in goods and services grew at an average real rate of about 6 percent a year—about twice that of real GDP growth during the same period (Figure 1). - Expansion supported by reductions in trade costs through policy (tariffs) and technology (transport and information). - Reductions in trade costs facilitated expansion of global value chains (GVCs), which have been a strong driver of productivity and manufacturing exports since the early 1990s. - Heterogeneity in gains - Extent to which trade powered economic growth depended on country characteristics and supporting policies. - Differences in growth benefits reflect economic structures (export specialization and production diversification) and quality of institutions. - Cross-country evidence links greater trade openness to higher per capita income and links trade reform (proxied as reductions in tariffs) to higher rates of productivity and income growth (Figure 2); declining poverty documented in Annex A on Trade and Poverty. - Recent slowdown and contributing factors - Trade and output growth slowed after the GFC; trade has been unusually weak relative to past performance. - Recent analyses attribute the trade slowdown, in varying degrees, to: - changes in composition of economic activity away from import-intensive investment; - slowing pace of global value chain growth and trade liberalization; - an uptick in trade protectionism. - Recent trade growth has been some 1 to 2 percentage points a year less than would have been expected based on the historical relationship between trade and macroeconomic factors (IMF, 2016a). ### Figures, annexes, and analytical components (inventory of substantive elements referenced) - Figures (topics and coverage) - 1. Real Trade and Real GDP, 1960–2016 - 2. Changes in Average Tariff and Annual GDP Growth, 1990–2015 - 3. Direction of Trade and Change in Manufacturing Share of GDP - 4. Average Tariffs, MFN Applied and Bound Rates, and Tariff Peaks - 5. Coverage Ratio of NTMs - 6. Estimated Restrictiveness of Services Trade Policy - 7. OECD Services Trade Restrictiveness Index Scores by Sector, 2016 - 8. Number of Trade Agreements, 1951–2015 - 9. Favorable Perception of Trade: Think Trade is Good, Selected Economies, 2014 - 10. Perceived Impact of Trade on Wages and Jobs, 2014 - 11. Gains from Trade for Bottom and Top Deciles - 12. Public Expenditure on Labor Programs, OECD Countries, 2013 - Annexes (analytic topics) - A. Trade, Growth, and Poverty in Developing Countries - B. Impact of Trade Agreements on Exports - C. The Effect of Trade on Real Incomes: Cross-country Evidence - D. Identifying and Quantifying Adjustment Frictions - E. Adjustment Policies: Country Experience ### Glossary — acronyms and terms used in the paper (selected) - AE Advanced economy - ALMP Active labor market program - CEA Council of Economic Advisers - EGAF EU European Globalization Adjustment Fund - EMDE Emerging market and developing economy - FTA Free trade agreement - GATS General Agreement on Trade in Services (WTO) - GFC Global Financial Crisis - GPA Government Procurement Agreement (WTO) - GVC Global value chain - ICITE International Collaborative Initiative on Trade and Employment - ILO International Labor Organization - ITA Information Technology Agreement (WTO) - JETRO Japan External Trade Organization - MFN Most favored nation - NTB Non-tariff barrier - NTM Non-tariff measure - OECD Organization for Economic Cooperation and Development - PROCAMPO Programa de Apoyos Directos al Campo (Mexico) - PTA Preferential trade agreement - RTA Regional trade agreement - SPS Sanitary and phytosanitary standards - STRI Services Trade Restrictiveness Index (OECD) - TAA Trade Adjustment Assistance - TBT Technical barriers to trade - TFA Trade Facilitation Agreement (WTO) - TJTC Targeted Jobs Tax Credit - UNCTAD United Nations Conference on Trade and Development - WEO World Economic Outlook (IMF) - WTO World Trade Organization *Source: IMF, World Bank, and World Trade Organization joint paper (Executive Summary, Introduction, and Section II excerpts).* ### 8. Trade integration since the early 1990s has also been associated with important ### 041017joint-wto-wb-imf-trade-paper - 8. Trade integration since the early 1990s has also been associated with important changes in the country composition of global trade ### Trade composition and integration since the early 1990s - Merchandise trade among AEs fell from about 70 percent in the early 1980s to less than 40 percent by the early 2010s (Figure 3, left panel), as trade involving EMDEs grew rapidly. - Rising commodity prices and other factors contributed to EMDEs’ rising share of global trade. - Services comprise some two thirds of global GDP and employment, and a quarter of global trade (nearly half of global trade measured on a value-added basis). - According to WTO figures, global commercial services imports grew at some 5 percent a year during 2010–15, compared to 1 percent growth for merchandise trade. ### Shifts in manufacturing and value chains - Increased EMDE manufactures exports have been accompanied by relative declines in the share of manufacturing to output in many AEs, where service sectors have generally grown more rapidly (Figure 3, right panel). - Manufacturing sector shares have increased in some AEs; EMDE experiences vary: - Manufacturing output increased most rapidly in countries with greater involvement in value chains, such as China, and other Asian and Eastern European EMDEs. ### Services trade expansion and barriers - Expanding services trade supported by new business models in areas like financial services and information and communication technology. - Growth in services trade occurred despite substantial policy barriers in many areas. - Services trade restrictions can be particularly damaging given the sector’s size and contribution to aggregate productivity growth. - Innovation in digital technology and other services has helped reshape the trade landscape and spurred development of GVCs. ### Trade policy landscape - The rapid pace of trade opening from the late 1980s to early 2000s has slowed sharply in recent years. - Tariffs have declined considerably but with little recent progress; they remain high for some products in some countries. - Cuts in applied tariff rates have not been locked in by corresponding reductions in WTO tariff ceilings (“bindings”). - Non-tariff measures remain pervasive for trade in goods. - Regional trade agreements increased in number and depth and sometimes go beyond the realm of the WTO, but lack the institutional and legal strengths of the WTO-led system. - The share of G20 imports affected by trade-restrictive measures put in place since the global financial crisis reached 6.5 percent as of November 2016. ### Trade costs - The costs of trading goods are estimated to range from 50 to 400 percent on a bilateral basis. - Trade costs reflect factors such as distance, investment climates, language, logistics, transport, and trade policies. - Trade costs tend to be higher for EMDEs (often double those of AEs) and for agricultural goods. - Over the last twenty years, most countries showed a modest reduction in these costs, with more rapid reductions by certain fast-growing EMDEs. - The WTO Trade Facilitation Agreement (TFA), which entered into effect in February 2017, is expected to contribute greatly to further reductions in some types of trade costs. - Services trade costs reflect both exogenous factors and policy (e.g., digitization extent, policies inhibiting investment flows or establishment of service suppliers, cross-border delivery, or free movement of professionals). ### Tariffs: trends and remaining gaps - EMDEs cut tariffs considerably to averages below 15 percent; advanced economies cut average tariffs from around 6 percent to below 3 percent (Figure 4). - A large gap remains between the ceiling rates bound in the WTO and applied tariff rates. - G20 developing countries have nearly a 20 percentage point excess of bound over applied tariffs. - “Peak” tariff rates (above 15 percent) remain on 31 percent of agricultural tariffs of G20 developing countries and 11 percent of agricultural tariffs of G20 developed countries. - Advanced economies’ tariffs on finished agricultural goods average 9 percentage points above those on raw agricultural products. ### Non-tariff measures (NTMs) - NTMs are pervasive; some represent domestic regulations (SPS, TBT) aimed at protecting health, workplace safety, the environment, or consumers. - Regulatory cooperation, where pursued, has helped to reduce costs and facilitate trade. - Other NTMs, such as quantity and price controls, directly interfere with market trade patterns. - Official data from 50 countries show: - The share of imports subject to regulatory NTMs (including SPS and TBT) is higher for AEs than for EMDEs, reflecting AEs’ more elaborate regulatory systems. - Quantity and price controls are more prevalent among low-income countries. - Regulatory NTMs are more prevalent for agricultural trade than for non-agricultural trade across all income groups; especially true for low-income countries where reported regulatory NTMs for non-agricultural trade are less common. ### Services trade restrictiveness - Measuring restrictiveness in services trade faces data and methodological challenges. - The World Bank Services Trade Restrictions Database and STRI reveal that restrictions on entry, ownership, and operations of foreign service providers remain common; opaque and discretionary licensing can make market access unpredictable. - The STRI index takes values from 0 (completely open) to 1 (completely closed); rescaled STRI values range from 0 to 100, 100 being the most restrictive. - According to the OECD STRI (2016), professional and transport services are among the most protected industries in advanced as well as developing countries. - Since 2014, some reforms reducing service restrictions have been adopted in a few countries (examples cited: lifting of foreign equity limits in one or more sectors in China, India, and Indonesia; liberalization of telecommunications in Mexico; easing requirements on establishing corporate residency in Japan). - Some countries have adopted tighter restrictions on the temporary movement of people to provide services through Mode 4 (subjecting temporary services suppliers to tighter quotas and labor market tests, and shortened durations of stay). - Some countries have imposed new restrictions on the cross-border transfer of personal data. ### Trade agreements: number and depth - Number of agreements notified to the WTO rose from about 50 in 1990 to around 280 in 2015. - A World Bank database documents increasing “depth” of agreements across 52 policy areas and their legal enforceability. - More recent PTAs cover substantially more policy areas than earlier PTAs that focused primarily on tariff liberalization. - Evidence points to a strong link between trade agreements and exports, particularly for “deep” agreements with broad policy coverage. - More than half of PTAs include “deep” provisions within and beyond current WTO mandate: - “WTO+” provisions include customs regulations, export taxes, countervailing measures, and technical barriers to trade. - A core subset of “WTO-X” provisions (competition policy, investment, movement of capital, and intellectual property rights protection) are included in one third of PTAs. ### Public attitudes toward trade - Public attitudes toward trade remain generally favorable but are down slightly, especially in advanced economies. - In AEs overall, the trough coincided with the onset of the global financial crisis; while there has been some recovery since, attitudes in some countries remain less favorable than in the early 2000s. - Public opinion surveys can provide mixed messages: attitudes at the micro level (effects on individuals and localities) are generally less favorable than at the macro level. - A Gallup Poll for the United States showed that 72 percent of respondents viewed foreign trade as an opportunity rather than a threat—the highest favorable ratings since the question was initiated in 1993. - Americans remain split on whether NAFTA is beneficial for the United States. ### Heterogeneity in attitudes and labor-market links - Attitudes tend to be more positive among emerging Asian economies with expanding manufacturing employment (Bangladesh, China, Malaysia, and Vietnam) and among more open advanced economies with trade surpluses (Germany, South Korea, and Spain). - Earlier cross-country data indicate perceptions toward trade are negatively influenced by increases in the unemployment rate, increases in the trade deficit, and contractions in the relative output of the tradeables sector. - People more vulnerable to employment and wage impacts have been more skeptical of trade: - In AEs, public skepticism that trade creates jobs and increases wages is higher, especially in countries where manufacturing import penetration has been stronger. - Survey data show attitudes toward trade are less favorable among unskilled or less educated workers in those countries. - In EMDEs, little difference in attitudes across skill education levels is observed; views are far more favorable on trade's impact on jobs and wages, especially in countries where exports are labor intensive. *International Monetary Fund, World Bank, and World Trade Organization (excerpts from provided content).* ### 24. Trade integration is a powerful tool to raise growth and improve living standards. ### 24. Trade integration is a powerful tool to raise growth and improve living standards. ### Increasing Productivity - A 138-country study attributed large positive productivity effects to trade openness: a 1 percentage point increase in openness raised productivity by 1.23 percent in the long run (Alcala and Ciccone, 2004). - Within that sample, an increase in openness from the twentieth percentile to the median value raises productivity by 160 percent. - Ahn and others (2016) estimate that a one percentage point reduction in tariffs on inputs used in a sector improves total factor productivity in that sector by 2 percent. - Canada–U.S. FTA evidence: - Increased Canadian labor productivity in the most impacted export-oriented industries by 14 percent. - Increased Canadian labor productivity in the most impacted import-competing industries by 15 percent (Trefler, 2004). - U.S. manufacturing experienced substantial productivity growth from lower industry-level trade costs during the late 1980s and the 1990s (Bernard and others, 2006). - Brazil’s 1988–90 trade reforms: - Total factor productivity growth increased by 6 percent, with a similar observed impact on labor productivity (Ferreira and Rossi, 2003). - Trade encourages innovation and technology upgrading: - Canadian plants’ increased innovation after U.S.–Canada FTA contributed a 14 percent productivity increase (Lileeva and Trefler, 2010). - Argentine firms increased technology spending by 20 to 30 percent in response to Brazil’s reduced tariffs under Mercosur (Bustos, 2011). - As much as 15 percent of Europe’s technology upgrading over 2000–2007 linked to increased competition from China (Bloom and others, 2015). - Knowledge spillovers: - In Slovenia, exporting raised firms’ productivity level by 4.1 percent (De Loecker, 2013). - Coe and others (1997) find total factor productivity is positively related to knowledge creation in trading partners across 77 developing countries. - Lumenga-Neso and others (2005) demonstrate indirect benefits from trading partners’ access to knowledge. - Trade promotes institutional reform, improved governance, and financial deepening: - Greater trade openness is associated with a deeper financial sector (Rajan and Zingales, 2004; WTO, 2013). - Research links greater trade to less corruption and reduced rent-seeking behavior (Krueger, 1974; Gatti, 2004). - Trade integration promotes better corporate governance and transparency (Tong and Wei, 2014), management practices (Bloom and Van Reenen, 2010), and product quality (Amiti and Khandelwal, 2013). ### Benefits for Consumers - Trade lowers prices and expands the variety of goods and services, raising real incomes and consumer choice. - India’s trade liberalization is estimated to have caused prices to fall by 18 percent (De Loecker and others, 2016; Goldberg and others, 2010). - Marginal costs fell more than prices; Goldberg and others (2010b) attribute 31 percent of the new products introduced by domestic firms to the impact of lower tariffs on inputs. - The value to U.S. consumers of the increase in import varieties between the 1970s and the 2000s estimated at 2.6 percent of GDP (Broda and Weinstein, 2006). - Tariff protection can be costly with large downstream effects: - U.S. imposition of additional tariffs on Chinese tire imports in 2009 cost at least $900,000 for each job saved on an estimated annual basis and was associated with three times as many job losses in other sectors (Hufbauer and Lowry, 2012). - Pro-poor bias of trade-induced price changes: - Faijgelbaum and Khandelwal (2016) find the effect of current levels of trade on prices has a pro-poor bias in all forty countries in their sample. - The bias arises because poor consumers spend relatively more on sectors that are more traded (e.g., food and beverages). - The pro-poor bias is stronger in advanced economies like Japan and the United States. - Comparative statics on eliminating trade: - Completely eliminating trade estimated to reduce real income across a broad set of countries by an average of 4 to 40 percent, depending on model specifications (Costinot and Rodriguez-Clare, 2014, Table 1). ### Other Benefits of Trade - Trade can contribute to greater social inclusion by reducing within-sector wage discrimination: - Intensified competition reduces firms’ ability to practice wage discrimination (Becker, 1957). - In U.S. manufacturing from 1976 to 1993, the gender wage gap narrowed rapidly in initially more concentrated industries that experienced larger increases in competition with trade reform (Black and Brainerd, 2004). - CEA (2015) shows U.S. industries with larger tariff declines experienced larger relative income gains for female employees during 1989–2009. - Essaji and others (2010) find trade reduced the U.S. race-related wage gap by 1.4 percentage points during 1983–93. - Klein and others (2010) show increasing exports diminished the gender wage gap and the pay gap between immigrants and non-immigrants in German manufacturing sectors from 1993 to 2007. - ILO evidence points to trade agreements with labor provisions promoting labor force participation, particularly for females (ILO, 2016). ### IV. Trade and Adjustment - Reallocation of resources required by trade can have adverse consequences if adjustment is costly. - Trade is not a main factor behind increased inequality overall; technology has played a key role (Helpman, 2016). - Adjustment costs can be large and long-lasting when impeded by mobility frictions and skill mismatches; costs are lower when growth is strong and labor markets function smoothly. - Trade changes demand for labor and skills and can affect wages even without adjustment costs: - Expansion of capital- (labor-) intensive sectors tends to increase the relative return to capital (workers). - Trade-driven within-sector reallocation favors more productive firms, increasing demand for skilled workers and potentially raising the skill premium (Goldberg and Pavcnik, 2007). - Labor mobility frictions increase adjustment costs and prolong transitions: - Frictions include costs of switching occupations, industries, regions, job security legislation, and imperfect credit markets. - Factor mobility frictions tend to be higher in developing economies (Artuç and others, 2015). - Higher frictions for female, older, and less skilled workers can exacerbate trade adjustment impacts (Artuç and McLaren, 2015). - Empirical consequences of frictions: - Indian workers sometimes accept lower wages in declining industries rather than move to expanding export-industry cities, creating large wage differentials (Topalova, 2010). - Simulation exercises suggest adjustment frictions in AEs can lead to transition periods of up to 10 years and reduce the gains from trade by up to 30 percent (Artuç and others, 2013; Dix-Carneiro, 2014). - Sharp increase in import competition around 2000: - Areas more exposed to competition from Chinese manufactures saw significant and persistent losses in jobs and earnings, falling most heavily on low-skilled workers (Autor and others, 2016; Pierce and Schott, 2016a). *International Monetary Fund, World Bank, and World Trade Organization (excerpts).* ### 41. These effects also impacted local services industries. Worker-level evidence suggests that ### 041017joint-wto-wb-imf-trade-paper - 41. These effects also impacted local services industries. Worker-level evidence suggests that ### Impacts on workers and employment - Worker-level evidence suggests the decline in earnings of low-skilled workers is driven mostly by those who leave the manufacturing sector and switch occupations. - One study attributes to Chinese import competition: - "some 17 percent (about 1 million) of total job losses in U.S. manufacturing during the period 1999–2011" - "1.4 million non-manufacturing jobs" (Acemoglu and others, 2016). - The effect appears strongest during the period 2000–07 (Autor and others, 2013). - Estimates for France and Spain indicate smaller impacts (Donoso and others, 2015; Malgouyres, 2016). - Long-term average earnings losses from displacements range from "7–16 percent", depending on dataset and methodology (Couch and Placzek, 2010). - Displaced manufacturing workers tend to be older, less educated, and longer-tenured than workers displaced from other sectors, and take longer to return to work, exacerbating losses (OECD, 2005; OECD, 2012; Kletzer, 2001). - Long spells of unemployment associated with trade shocks lead to worse health outcomes, higher mortality, and lower achievements by children of affected workers (Pierce and Schott, 2016b; Autor and others, 2015; Davis and von Wachter, 2011). ### Interpretation and broader context - These studies highlight the need for appropriate adjustment policies rather than closing markets. - Bilateral trade relationships tell only a partial story; negative labor-market outcomes from trade with one partner may be offset by positive outcomes from trade with other countries (Ebenstein and others, 2015). - Example: a German study finds trade with China and Central Eastern Europe led to net job creation (Dauth and others, 2014). - The experience with intensified import competition from China should not be overgeneralized because: - (i) Chinese output in the late 1990s and early 2000s grew considerably faster than demand—a trend that is already reversing as China's GDP composition changes; - (ii) U.S. labor-market disruptions associated with the dot-com bubble burst in the early 2000s may have exacerbated negative impacts of import competition (Davis and Wachter, 2011). - Overall, trade openness is associated with somewhat higher levels of employment; the impact of trade on unemployment via sector-specific labor-market frictions is minor (Carrere and others, 2016). - Cross-country studies tend to show openness has small but positive effects on employment (Dutt and others, 2009). - More relevant drivers of long-run unemployment rates include labor-market institutions and technical change (Berger and Frey 2016; Blanchard 2006). ### Rationale for policy action - Policies to facilitate adjustment can address downsides of trade; inattention allows problems to become entrenched and may undermine public support for trade. - Trade shocks often arise from deliberate policy decisions to reduce protection, making mitigation particularly relevant. - Challenges from trade liberalization resemble those from technological improvement; policies that mitigate trade-related losses also help address technology-induced shocks. - Trade policy shocks are typically permanent and asymmetric across sectors, regions, and worker types; losses concentrate in import-competing sectors, causing long-lasting displacements and large earnings losses (OECD, 2005; Kletzer, 2001). ### Priority areas for policy - Early and comprehensive action to improve labor mobility is a priority: - Declining interstate labor mobility in the United States (Dao and others, 2014). - Substantial non-participation in the labor force after mass layoffs (Foote and others, 2015). - Limited worker migration from regions exposed to Chinese import penetration, raising unemployment and lowering wages (Autor and others, 2013). - Domestic migration in response to local employment shocks is even more limited in Europe (and to some extent in Canada) than in the United States (Obstfeld and Peri, 1998). - Labor-market policies should be complemented by: - Macroeconomic stabilization policies, since displacement costs are higher during downturns (Davis and von Wachter, 2011). - Measures to support competitiveness and productivity growth so displaced workers find opportunities in expanding sectors. - Credit policies to fund self-employment, human capital investment, and physical capital of firms (Bacchetta and Jansen, 2003). - Housing market policies to improve geographic mobility and regional policies to re-orient harder-hit regions. - Fiscal transfers from more to less fortunate regions as short-term cushions, acknowledging potential to delay necessary adjustment (Obstfeld and Peri, 1998). ### Heterogeneity and policy design considerations - No one-size-fits-all strategy; policy design and sequencing should account for: - Degree of factor market flexibility - Level of and access to education - Depth of and access to financial, credit and insurance markets - Coverage and depth of social safety nets - Degree of informality (relevant for EMDEs) - Countries as diverse as Denmark and the United States have similar post-displacement re-employment rates despite different labor-market policies and structural characteristics (Kenworthy, 2010; OECD, 2016b). - More research, including experiments, is needed to evaluate effectiveness of programs (example: basic income experiment in Finland). ### Labor-market policies to mitigate trade adjustment costs - Labor-market programs—both active and passive—can be effective when well-designed and tailored to country circumstances. - Size and composition of programs vary substantially across countries; Nordic countries have expansive coverage, while Japan and the United States spent "less than 1 percent of GDP" on both active and passive programs (2013 data). - Tradeoffs exist between active and passive programs; the balance depends on country institutions and rigidities. ### Active Labor Market Programs (ALMPs): key components and evidence - Early and frequent engagement with displaced workers ("activation strategies"): - Improve outcomes by increasing job search intensity through benefit sanctions or mandatory participation in training or subsidized employment (Boeri and van Ours, 2008; OECD, 2015a). - Displaced workers are typically required to engage with employment counselors, apply for vacancies, formulate action plans, accept suitable work, and attend training when necessary. - Activation strategies increased re-employment rates, especially for hard-to-place and long-term unemployed (OECD, 2015a). - Early, frequent, personalized or targeted counseling is integral to success; benefit sanctions can speed re-employment (van der Klaauw and van Ours, 2013). - Training programs: - Can address skills gaps, but impact varies substantially. - More effective when closer to regular jobs and when targeting disadvantaged outsiders (Brown and Koettl, 2015). - On-the-job training is more effective than classroom training in raising employment probability (evidence from Canada and Sweden). - Strong ties between programs and the private sector, and independent training authorities, can improve outcomes (example: Singapore’s Institute for Technical Education). - Job search assistance: - Facilitates matching, particularly for older, long-tenured workers lacking ability to identify geographically or sectorally distant matches. - Low cost relative to training, but insufficient alone for structural unemployment caused by trade shocks. - Can impose negative externalities by displacing other unemployed workers, especially during downturns (Crepon and others, 2013). - Wage subsidies, supplements, or insurance: - Can incentivize faster acceptance of new employment by partially compensating potential wage loss. - Help alleviate initial income loss and support experience accumulation in a new sector. - Risk moral hazard (employers offering lower wages knowing compensation exists). - Evidence is mixed: survey of 17 evaluations found only six programs reported positive employment impacts and only five on earnings (Betcherman and others, 2004). - A Canadian randomized experiment in 1995–96 testing wage supplements for dislocated workers had inconclusive results (Bloom and others, 1999). - Structural estimates using Brazilian data suggest wage insurance conditional on new job being in comparative advantage industry would outperform unemployment insurance in output dynamics and compensation (Cosar, 2013). - Reemployment bonuses: - Experiments in U.S. states suggest bonuses can improve job-finding rates; bonuses to workers are more effective than to employers (Woodbury and Spiegelman, 1987). - Bonuses targeted to potential long-term unemployed can be cost effective (O’Leary and others, 2005). - Evidence is mixed across countries: in the Netherlands, penalties (benefit sanctions) sped exit from unemployment, but re-employment bonuses did not (van der Klaauw and van Ours, 2013). *Source: Excerpt from IMF–World Bank–WTO joint paper (041017joint-wto-wb-imf-trade-paper), sections 41–53.* ### 54. The track record of ALMPs has been mixed, which may in part be due to the challenges ### Passive Labor Market and Social Protection Policies ### Track record of Active Labor Market Programs (ALMPs) - The track record of ALMPs has been mixed, partly due to challenges in assessing their impact. - Key findings from survey and evaluation literature: - Heckman and others (1999): public employment and training programs had at best a modest positive impact on adult earnings; when earning gains occur they result from increased employment probability rather than higher wages. - Card and others (2010): found substantial variation (in the sign and significance) of program impacts across studies. - Crepon and van der Berg (2016): review of randomized controlled trials concludes ALMPs have not been particularly effective. - Brown and Koettl (2015): mixed track record may be due to evaluation challenges, measurement of indirect costs and benefits, heterogeneity in success measures, and differing time horizons. - Engbom and others (2015): demonstrate a trade-off between shortening unemployment spells and attaining high earnings after re-employment (illustrated in evaluation of Germany’s Hartz reforms in the early 2000s). - Footnote findings preserved from source: - Payments to workers seem more effective than those paid to employers in the case of wage subsidies (Dickert-Conlin and Holtz-Eakin, 2000). - The modest success of programs is attributed to low per-capita expenditures on participants and targeting toward relatively unskilled and less able individuals. ### Unemployment benefits, activation, and related labor-market policies - Unemployment benefits can complement ALMPs by smoothing consumption and making training and job search feasible; this can often outweigh well-known drawbacks. - Examples and policy considerations: - Such policies are in place in the developed world and some emerging markets covering all eligible unemployed; the U.S. TAA provides an extension of benefit duration for trade displaced workers (Annex E). - Activation policies are often tied to unemployment benefits; consideration could be given to strengthening and tailoring these strategies to trade-displaced workers. - Employment protection and minimum wage: - Employment protection can reduce displacements but may impede necessary reallocation; broad consensus favors limiting employment protection and pairing low hiring/firing costs with protection through unemployment benefits (as in Nordic countries; Annex E on Denmark). - Minimum wage policies can protect low-skilled workers and ensure a basic income level (Blanchard and others, 2013), but must be designed carefully to avoid negative employment and efficiency effects. - An overly high minimum wage, coupled with high payroll taxes, can hinder employment prospects of vulnerable groups (OECD, 2006). ### Social insurance, long-term income support, and health insurance - Other social insurance and income support programs can be necessary for longer-term dislocated workers and families but are costly. - Design and risks: - Means-tested support or early retirement is often provided to displaced workers who no longer qualify for unemployment insurance. - In countries with less stringent disability insurance screening (U.S. and Northern Europe), such transfers can de-facto become important long-term income support (Bratsberg and others, 2010; Autor and Duggan, 2003). - Health insurance can be part of policy design, especially where access to affordable health services is limited. - Reliance on these programs is often costly; efforts should be made to minimize dislocated workers dropping out of the labor force. - Note from source: The “basic income” or negative income tax has the same objective of providing a minimum standard of living (Tyson, 2014) and unlike the minimum wage does not require recipients to be employed. - Kletzer and Litan (2001) favor including health insurance as a second component after wage insurance to relieve worker anxiety. ### Complementary policies beyond labor-market measures - A broader approach is necessary to ease adjustment, including macroeconomic stabilization, competitiveness measures, and addressing rigidities in other sectors. - Housing policies: - Home ownership is often associated with longer housing tenure; mobility may be constrained by differences in housing price dynamics across regions (Coulson and Fisher, 2009). - Supporting mobility from depressed communities may require consideration of relocation allowances. - Credit policies: - Well-functioning mortgage markets and access to credit for education, self-employment, or start-ups can ease workers’ adjustment. - Credit to firms facing greater foreign competition can help reorient business models and invest in new technology; credit to potential exporter firms can facilitate entry and harness benefits from trade (Manova, 2013). - Place-based policies: - Traditional view: place-based policies create distortions and limited case for using public funds to encourage disadvantaged people to stay in weak regions (Glaeser and Gottlieb, 2008; Moretti, 2011). - Neumark and Simpson (2014): enterprise zone programs did not necessarily improve employment outcomes overall. - Exceptions and evidence: - U.S. Empowerment Zone program: employment tax credits for firms and block grants for infrastructure, business assistance, training etc. suggest substantial increases in employment and wages for local workers (Busso and others, 2013). - French Zones program (Franches Urbaines): higher business creation and employment but with offsetting declines in surrounding areas (Givord and others, 2013). - Discretionary grant schemes in European countries offering subsidies to private firms to promote inward investment appear to have a better track record, perhaps due to closer monitoring of grant recipients (Neumark and Simpson, 2014). - Education policies: - Labor market outcomes depend on technical skills and a wide range of cognitive and non-cognitive skills (Heckman and others, 2006). - Importance of strengthening early childhood, primary and secondary schooling (Almeida and others, 2012) to ensure future workers adapt to a rapidly changing economic and technological environment. ### Trade-specific programs for displaced workers - Rationale and examples: - Workers displaced by trade or technological change are more likely to require retraining due to long-lasting structural transformations. - Prominent trade-specific programs: U.S. Trade Adjustment Assistance (TAA) and EU European Globalization Adjustment Fund (EGAF); regional programs such as Mexico’s PROCAMPO (1993–94) addressed trade liberalization consequences. - Effectiveness, coverage, and scale: - Effectiveness has been mixed; comprehensive evaluation of U.S. TAA found training did not improve earnings and employment outcomes (D’Amico and others, 2007), though Park (2012) found support for the training component. - Budgets cited: TAA had 800 million USD (2015); EGAF had 115 million EUR (2014) — characterized as tiny fractions of these countries’ GDPs. - Programs suffer from lack of worker awareness (Cernat and Mustilli, 2016; European Commission, 2011); TAA take-up rate was about 40 percent of eligible workers (Rosen, 2008); take-up smaller for ATAA/RTAA (wage insurance module), with low take-up linked partially to lack of knowledge (D’Amico and others, 2007). - Evidence from EMDEs is scant; programs typically ad hoc and not part of comprehensive displacement strategies, later integrated into broader social safety nets (Hollweg and others, 2014). - Source note: Schochet and others (2012) find TAA participants used re-employment and training services more frequently and were more likely to switch industries and occupations, but by the final year of follow-up TAA participants had lower earnings, especially older workers. ### Building stronger rules-based trade and trade-related policies to share gains widely - Historical context: - Current rules-based global trading system arose after the Great Depression and Second World War; GATT (established 1948) and later WTO (1995) strengthened rule enforcement and dispute settlement. - Importance of rules-based trade: - Policy transparency and strong, well-enforced rules promote competition and reassure the public that international trade is evenhanded, covering conventional measures and behind-the-border measures. - The multilateral system has helped prevent protectionist spirals and is increasingly used by EMDEs. - Policy priorities to share trade benefits and ease domestic adjustment: - Avoid increases in trade restrictions, subsidies, and other trade distortions; roll back measures introduced since the global financial crisis (documented in WTO monitoring reports). - Further opening to trade through global negotiations would enhance productivity and raise incomes; progress in areas like agriculture, services, and digital trade can make large contributions to global growth. - Role of trade-related policies and international cooperation: - Open markets and reduced trade distortions abroad facilitate domestic adjustment by enabling expansion in export areas; trade barriers abroad that prevent export expansion prolong domestic adjustment. - Domestic policies such as advanced announcement and gradual phasing of trade liberalization can avoid labor market bottlenecks and buy time for domestic cost-mitigating policies (Bacchetta and Jansen, 2003), though trade-offs exist (Trebilcock, 2014). - Temporary import safeguards may be appropriate in exceptional circumstances when consistent with WTO obligations, but their adverse effects (on downstream workers, consumers, and policy uncertainty) must be considered. - Examples of multilateral and cooperative approaches: - G-20 Global Forum on Steel Excess Capacity (2016) to enhance cooperation regarding industrial overcapacity. - Abidance by and enforcement of core ILO labor standards can reassure domestic workers and have been included in certain RTAs; international cooperation on labor standards and environmental standards can be tailored to local conditions without requiring identical standards across countries. - Dialogue and cooperation through the G-20, IMF, OECD, and other fora on macroeconomic policy can minimize global disruptions and create a more conducive environment for trade; IMF has provided policy advice to countries transitioning toward market economies on state-owned enterprises and industrial overcapacity as part of rebalancing toward consumption. *International Monetary Fund, World Bank, and World Trade Organization (excerpts).* ### 68. The slower pace of reform since the early 2000s and post-crisis uptick in new trade ### 041017joint-wto-wb-imf-trade-paper - 68. The slower pace of reform since the early 2000s and post-crisis uptick in new trade ### Trade reform agenda and current distortions - Despite important recent steps, such as the entry-into-force of the WTO Trade Facilitation Agreement (TFA) in February 2017, measures such as tariffs, subsidies, and restrictions on services trade continue to weigh on trade. - Further trade reform can go far in promoting stronger global economic growth (IMF, 2016b). - The slower pace of reform since the early 2000s and post-crisis uptick in new trade distortions leaves a large agenda for trade reform. ### Tariffs, NTMs, and traditional barriers - Addressing tariffs and other traditional trade barriers is a key agenda item. - Significant tariffs remain, especially in agriculture and in key manufacturing sectors. - Further cuts to MFN bound and applied rates would: - promote policy certainty, - further open trade, - help resolve today's patchwork of tariff preferences and rules of origin. - Further disciplining NTMs, including subsidies in agriculture and other areas, would help to level and strengthen the global trading environment. ### Services, digital trade, and frontier areas - Services account for two-thirds of global GDP and employment. - Further opening international services flows will expand global trade and promote key enablers of economic growth such as transport, communications, finance, and data processing. - The growing digitization of economic activity—and the globalization of the internet—is giving rise to: - new tradable products, - new ways of trading, - new strategies for organizing global production. - Existing multilateral and regional trade rules already cover many aspects of digital trade, but there may be a need to: - update countries' specific commitments, - clarify and enhance rules in certain areas. ### Policy cooperation, value chains, and regulatory coherence - Integrated global production structures require reforms across several policy areas, reflecting exchanges of components, services, investment, and technology among interlinked global production networks. - Trade and investment are increasingly interlinked facets of regional and global value chains; reforms in one area work best when the other is reformed as well. - Frontier issues such as services and investment require cooperation among diverse regulatory systems, often led by different agencies, underscoring the need for coherent policy approaches. ### New WTO approaches in a more complex trade policy landscape - An open, stable global trading system rests on a strong WTO at its center. - Regional and bilateral trade agreements can bring important benefits, including: - leading the way on certain ‘frontier’ issues, - expanding on WTO obligations and commitments on services or intellectual property, - establishing rule-making precedents for action at the global level. - The WTO's institutional and legal framework, near universal membership, and ability to apply positive steps in RTAs at the global level are unique advantages that cannot be replicated in RTAs. - Many issues—from farm subsidies to digital trade—are inherently global and best solved through global cooperation and rule-making. ### Negotiating approaches and recent WTO experience - The Uruguay Round (concluded in 1994) treated all issues as a "single undertaking," which made negotiation increasingly complex as subjects, countries, and trade-offs expanded. - Recent advances demonstrate the value of continuous and more narrowly focused negotiations: - WTO Ministerial Conferences in Bali (2013) and Nairobi (2015) involved smaller "packages" of issues. - Achievements include the Trade Facilitation Agreement, the Expanded Information Technology Agreement (ITA), and the Decision on Eliminating Agricultural Export Subsidies. - Plurilateral negotiations and "critical mass" undertakings can be effective in a diverse WTO of 164 Members: - Some plurilateral agreements inside the WTO (such as the GPA) are non-MFN (benefits limited to signatories) but provide transparency, legal/institutional links to the WTO, and a path for expanded membership. - ITA expansion negotiated among a "critical mass" of WTO members extended benefits on an MFN basis. - The TFA represents a novel approach: - first WTO agreement in which Members determine their own individual implementation schedules, - implementation progress explicitly linked to technical and financial support, - framework for technical assistance and capacity building to help countries adapt and modernize customs systems. ### Emphasis on cooperative solutions and cross-border regulatory issues - Trade facilitation negotiations were driven by cooperative solutions to shared challenges (e.g., standardizing customs procedures and harmonizing documentation) rather than solely by market access. - Expanding cross-border cooperation is relevant to regulatory issues where the objective is to minimize regulatory frictions by advancing shared policy objectives in a least trade restrictive way. ### Final remarks: communicating benefits, domestic support, and policy priorities - Opening of trade over past decades has helped drive global economic growth, lifting incomes across advanced, emerging, and developing countries. - A prolonged period of disappointing economic growth and inadequate attention to those left behind has spurred increased skepticism over open trade. - Countering skepticism requires: - better communicating the benefits of trade, - better sharing benefits with those affected by trade-related dislocations, - well-crafted further trade reforms, - continued enforcement of global trade rules. - Supporting domestic policies and prompt attention to those at risk of being left behind are critical: - training, - temporary income support, - job search assistance, - targeted trade adjustment assistance. - Approaches beyond labor market policies—such as education, housing, and regional policy—are also needed and should be tailored to country circumstances. - Policy priority: resist further trade restrictions and domestic policy interventions, like subsidies, that distort trade, and remove existing ones. - Traditional areas (e.g., agriculture) and frontier sectors (e.g., services, digital trade) need attention; WTO-based multilateral agreements—where possible—are the best way to secure stronger rules-based global trade. ### Annex A — Trade, growth, and poverty in developing countries - The impact of trade on poverty is central to the development debate; World Bank and WTO joint 2015 publication The Role of Trade in Ending Poverty reviews evidence and policy issues. - Openness is associated with accelerated growth in average incomes, and growth is associated with poverty reduction. - Example: the income growth of the bottom 20 percent increases almost 1 for 1 with average income growth. - Figure A.1 (1993–2008) shows a strong correlation between change in real income of the lowest quintile and change in openness for EMDEs with average population greater than 20 million (dot size proportional to population). - Microeconomic studies document pro-poor impacts of trade liberalizations in many cases: - 2001 US-Vietnam Bilateral Trade Agreement led to poverty reduction in Vietnam by increasing wage premia in export-oriented sectors, job reallocation from agriculture, forestry and fishing into manufacturing, and stimulating enterprise job growth (McCaig, 2011). - MERCOSUR benefited poor and middle class Argentine households relatively more than rich households (Port, 2006). - However, trade does not always reduce poverty; heterogeneity in initial conditions and patterns of liberalization matter (e.g., some evidence for India in the 1990s). - The potential for trade to reduce poverty depends fundamentally on the institutional environment and complementary policies (access to finance, well-functioning labor markets, minimizing intra-national frictions, minimizing adjustment costs, and providing insurance against globalization risks). ### Annex B — Impact of trade agreements on exports - Evidence points to a strong link between trade agreements and increased exports: - Meta-analysis (2006-2012) finds free trade agreements increase bilateral trade by around 40 percent (Head and Mayer, 2014). - Baier and Bergstrand (2007, 2009) find trade agreements increase trade by around 100 percent in the long run using instrumental variables and nonparametric techniques. - “Deep” trade agreements that cover issues such as investment and competition policy appear to have even stronger effects (Mattoo and others, 2017). - Synthetic control methods provide an alternative empirical approach to identify agreement effects. - When synthetic controls were used on 104 pairs of countries that entered a trade agreement between 1983 and 1995: - average gross exports of countries with trade agreements is 80 percentage points higher over the next ten years using this methodology; - this translates into a boost in the annual rate of export growth of 3.8 percentage points; - export gains are particularly high for small countries, and for emerging markets when they have trade agreements with advanced markets; - advanced economies exporting to emerging markets had smaller export gains; - there were 24 country pairs (approximately a quarter of the cases) for which the analysis suggests possible declines in exports owing to trade agreements. *Source: INTERNATIONAL MONETARY FUND, WORLD BANK, AND WORLD TRADE ORGANIZATION (content unit provided).* ### Annex C. The Effect of Trade on Real Incomes: Cross-country ### Annex C. The Effect of Trade on Real Incomes: Cross-country Evidence ### Estimated causal effect of trade on income - Simple regressions of income on trade are generally inconsistent because variables that affect income directly can also affect trade (for example, regulatory behind-the-border barriers). - Frankel and Romer (1999) instrument trade openness using a gravity equation with geographical characteristics (proximity, landlocked status) to isolate exogenous variation in trade. - Using 1985 data, Frankel and Romer (1999) find that a one percentage point increase in openness (exports plus imports as a share of GDP) causes real income to be 2 to 3 percent higher. - Reproducing this exercise on yearly samples from 1990 through 2014 (Cerdeiro and Komaromi, forthcoming) yields: - A one-percentage-point increase in trade openness raises real per capita income by 2 to 6 percent. - Estimates hovered around 4 to 5 percent since the early 1990s but fell to nearly 2 percent after the global financial crisis. - The decline in the estimated effect after the global financial crisis is hard to pin down but highlights the need for complementary structural reforms to lift growth. - Cross-country estimates reflect long-run effects of trade on growth and do not provide information on temporary adjustment costs or the channels through which trade affects income; micro-level evidence is a necessary complement for policy design. *Source: Annex C, 041017joint-wto-wb-imf-trade-paper — “Annex C. The Effect of Trade on Real Incomes: Cross-country Evidence”* --- ### Annex D. Identifying and Quantifying Adjustment Frictions ### Major categories of adjustment frictions - Skill mismatches: - Industry- or firm-specific job skills may not transfer easily across firms or industries, raising costs of changing jobs (retraining, longer unemployment spells, lower starting wages). - Switching industries within manufacturing: workers in developed countries estimated to forego the equivalent of 2.76 times their annual wage in lifetime income (Artuç and others, 2015). - Switching occupations yields costs that vary across occupations and skill levels; college-educated workers experience on average lower costs (Artuç and McLaren, 2015). - Geographic frictions: - Obstacles to relocation include job search and travel costs, social networks, family ties, housing policy, migration restrictions, and cultural barriers. - Example: China’s Hukou household registration system is estimated to have reduced China's gains from trade markedly (Zi, 2016). - Policy distortions: - Job protection regulations and other policies can impede firm contraction and expansion after trade reforms, reducing trade benefits. - Inflexibility in Mexico’s labor market slowed labor reallocation after trade reform so that benefits were as much as 30 percent less than under a more flexible market (Kambourov, 2009). - Capital mobility: - High capital adjustment costs (high upfront fixed costs, investment irreversibility) impede scaling up production and labor adjustment. - Reallocation in Brazil following trade liberalization would accelerate from 14 years to 4 years if capital were completely mobile (Dix-Carneiro, 2014). ### Distributional aspects - Frictions often affect workers differently; costs are frequently higher for female, older, or less educated workers (Dix-Carneiro, 2014). *Source: Annex D, 041017joint-wto-wb-imf-trade-paper — “Annex D. Identifying and Quantifying Adjustment Frictions”* --- ### Annex E. Adjustment Policies: Country Experience ### A. Challenges to mitigating trade-related dislocations in EMDEs - Structural characteristics of EMDEs complicate mitigation: larger informal sectors, weaker institutions, lower education levels. - Empirical evidence: - Trade liberalization in EMDEs is generally followed by limited sectoral reallocation and more pronounced wage than employment responses (Goldberg and Pavcnik, 2007). - Large labor mobility costs in EMDEs are negatively correlated with development measures such as GDP per capita and educational attainment (Artuc, Lederman, and Porto, 2015). - Factors complicating policy design: - Lower education: In 2010, average formal schooling of adults in EMDEs was 7 years versus 11.3 years in advanced economies (Barro-Lee Educational Attainment Dataset). Low basic skills and weak education quality reduce vocational training effectiveness (Bassi and others, 2012; Silva and others, 2015). - Higher informality: Large informal sector reduces tax base, limits public funds for programs, and complicates participation in contributory schemes; alternative income protection mechanisms or tailored social protection elements are recommended (Vodopivec, 2006; Acevedo, Eskenazi and Pages, 2006). - Weaker capacity: Weaker institutions and administrative capacity complicate eligibility verification and control of fraud and moral hazard. - Active Labor Market Policies (ALMPs) in EMDEs: - Poor track record in randomized experiments for vocational training, wage subsidies, and matching assistance; calls for better targeting (McKenzie, 2017). - Low funding: Examples — among nine Latin American and Caribbean countries, spending on labor market programs is generally increasing but low; Brazil spends 0.8 percent of GDP on labor market programs, one quarter of which was allocated to active programs, well below the OECD average (Silva and others, 2015). ### B. Experience in Denmark (flexicurity model) - Denmark does not have trade-specific displacement policies but relies on a flexicurity system that serves all unemployed workers via: - Pillar (i): flexible labor market allowing employers to hire and fire easily; - Pillar (ii): generous unemployment benefit system; - Pillar (iii): strong activation policies incentivizing job search and enhancing employability. - Interconnections and outcomes: - High job turnover under flexibility necessitates strong unemployment insurance; generous benefits necessitate strict activation (profiling, monitoring). - Denmark spends more on ALMPs than any other OECD country as a share of GDP (OECD, 2016b). - Long advance notice periods to regional labor market councils, increasing with job tenure, create space for early action. - Limitations and areas for improvement: - System does not distinguish displaced workers from others; profiling tools do not specifically identify displaced workers or involuntary job loss as criteria for program assignment. - Early intervention tends to concentrate on large dismissals from large firms; notice periods shorter for blue-collar than white-collar workers; a substantial share of low-wage and low-skilled workers is not covered by unemployment insurance. - Take-up rates of employer-provided, publicly-subsidized training among older and less-skilled workers remain challenging; OECD recommends promoting take-up among workers who need it most. - Trade-specific funding: - As trade policy is conducted at the E.U. level, Denmark received European Globalisation Adjustment Fund support: between 2009-14 the Fund provided funding to seven selected Danish firms totaling approximately 21 million euros (OECD, 2016b). - Evidence on ALMP effectiveness: - Randomized experiment (Vikström, Rosholm and Svarer, 2011) finds ALMPs reduce unemployment spells; frequent meetings with case workers were most cost-effective. - Activation policies including sanctions and intensified job search contributed to system effectiveness (Andersen and Svarer, 2007). ### C. United States — policies to mitigate trade-related dislocations - Import competition in manufacturing has had geographically concentrated effects, with substantial local employment declines and non-manufacturing wage declines (Autor and others, 2013); less-educated and older workers experience larger losses and higher withdrawal from the labor force. - Trade Adjustment Assistance (TAA) program: - Introduced in 1962; reforms in 2002 and 2009 expanded eligibility (including services and outsourcing), increased training funding (cap raised from $220 to $450 million), and added benefits. - Program certified as eligible about 120,000 displaced workers, at a nominal annual cost of about $800 million. - Key features: - Extended unemployment compensation: up to 24 additional months of benefits, often conditional on using TAA-approved training and reemployment services; roughly half of participants enroll in training services provided through local One-Stop Career Centers. - Job search/relocation assistance: covers 90 percent of associated costs up to $1250. - Wage insurance: reemployed workers 50 years or older and earning under $50,000 a year receive a wage supplement equal to half the difference between previous and new wage, up to $10,000 a year, for up to two years; some 5 percent of eligible participants have enrolled. - Health insurance tax credit: covers up to 72.5 percent of healthcare premiums. - Unemployment insurance: - Largest social insurance program for displaced workers, absorbing over three-fourths of the budget for displaced workers (OECD, 2016a). - Provides full-time, involuntarily displaced workers who are actively seeking a job up to 26 weeks of benefits averaging half of past earnings. - Benefit duration can be extended during recessions; program is financed through state payroll taxes allowing state design latitude. - Historically, 40–50 percent of displaced workers receive these benefits, and about 30 percent of beneficiaries exhaust them. *Source: Annex E, 041017joint-wto-wb-imf-trade-paper — “Annex E. Adjustment Policies: Country Experience”* ### 107. Other social insurance, namely retirement and disability insurance, are increasingly ### 041017joint-wto-wb-imf-trade-paper - 107. Other social insurance, namely retirement and disability insurance, are increasingly ### Social insurance provided to trade-displaced workers - Retirement and disability insurance are increasingly provided to trade-displaced workers who are eligible for retirement or disability. - Disability benefits vary according to past earnings and likely reflect anxiety-related illnesses affecting displaced workers. - Autor and others (2013) estimates that these social insurance transfers comprised "some 30 percent" of total transfers to workers displaced by China’s import penetration. - The figure would be larger if disability-related health benefits to workers are included. ### Means-tested income support programs - Means-tested income support programs also provide assistance to displaced workers. - Examples include Temporary Assistance to Needy Families, Supplemental Nutrition Assistance, Medicaid, Supplemental Security Income. - Overall transfers from these programs are generally small and do not raise income above the poverty threshold. ### Other policies, coverage, and funding - Work-sharing schemes in about half of the states provide income support to workers who experience reduced hours worked or are temporarily laid off. - Recent federal guidelines under the 2012 Layoff Prevention Act may encourage participation and pertain to some "1–2 percent" of unemployment claims. - Employment protection legislation and early warning mechanisms tend to be fairly lenient and limited in scope (e.g. advanced warning applies to firms with over "100" workers, where at least "50" workers are affected). - Federally-mandated programs to support employment of dislocated workers (e.g. Rapid Response Service) do not currently provide the needed tailored assistance to dislocated workers. ### Figure E.2 — United States’ Composition of Income Transfers Associated with Intensified Chinese Import Competition, 1990-2007 - Source: Autor and others (2013). - Disability/Retirement Insurance: 31.9 - UI/TAA benefits: 6.3 - Income assistance: 26.1 - Medical benefits: 31.6 - Other: 4.1 *International Monetary Fund, World Bank, and World Trade Organization content unit 041017joint-wto-wb-imf-trade-paper - 107.* ### References ### 041017joint-wto-wb-imf-trade-paper - References ### Trade shocks, labor markets, and adjustment - Acemoglu, D., Autor, D., Dorn, D., Hanson G., and Price B. 2016. 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