## Change in Openness and Income of the Poor ## Source details **Canonical URL:** [Change in Openness and Income of the Poor](https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021074-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2021/english/wpiea2021074-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2021/english/wpiea2021074-print-pdf.pdf.json) --- ### Trade and inclusion concerns - Inequality and trade have both increased in many developed and developing countries since 1990. - Over the past few decades, inequality rose in most advanced countries and in several developing and emerging economies, especially in Eastern Europe and Asia. - Trade openness expanded until the Global Financial Crisis, driven in part by trade liberalization and integration from emerging market countries such as China. - Political and public reactions tied to trade: Brexit; trade tensions between the U.S. and China; the U.S. withdrawal from the Trans-Pacific Partnership; other increases in protectionism and a rise in economic nationalism. - Other forces besides trade contributed to rising inequality, notably technological advances (reference to Cerra et al. (2021)). - Public perceptions of trade are correlated with country economic performance: - Pew Research Center’s Spring 2018 Global Attitudes Survey shows a high correlation between the country’s GDP growth rate and the belief that trade will increase wages. - Most people consider trade to be good for their countries and to create employment opportunities, with somewhat more optimism in emerging countries. - Individuals with higher education and above median incomes are more likely to think trade creates jobs. ### Historical and recent international trade trends - Long-run drivers and patterns: - Trade grew by over 300 percent between 1870 and the start of WWI due to declining trade and communication costs prompted by technological innovations such as the steam ship and telegraph. - Trade collapsed during the two world wars and the Great Depression, with protectionism like the Smoot Hawley Act contributing. - Trade volumes surged by 7 percent per annum from 1950 to a high of roughly 60 percent of GDP (summing exports and imports) by the 2008-09 Global Financial Crisis (GFC). - Post-war drivers: - Technological change reduced transportation and communication costs (e.g., containerization). - High-income countries reduced tariffs to less than 5 percent by the 1980s in early GATT rounds. - Developing countries undertook major unilateral liberalizations in the 1980s and 1990s. - Regional trading agreements proliferated since the 1980s (examples include the European Union, NAFTA, ASEAN). - Changing composition: - Early 1990s: merchandise trade between advanced countries was about 2/3 of global trade; fell to about 1/3 as trade between EMDEs and AEs increased. - China’s share of world merchandise exports grew from 1.2 percent in 1983 to 13.1 percent in 2018. - Asia’s share in world merchandise exports grew from 19.1 percent to 33.6 percent in the same period (text indicates EMDEs expanded their share). ### Recent global trade composition and digitalization - GVCs and services: - Global value chains rose from about 37 percent of total trade in 1970 to above 50 percent by the mid-2000s (WDR2020). - Trade in services grew at 5.4 percent per year on average between 2005 and 2017 and now accounts for about one-quarter of total trade (IMF-WB-WTO, 2018). - Digital and e-commerce indicators: - Value of e-commerce transactions estimated at US$27.7 trillion in 2016, up 44 percent from 2012 (USITC 2017; WTO, 2018). - International streaming revenue for Netflix grew from US$ 4 million to US$ 5 billion between 2010 and 2017 (WTO, 2018). ### Short-term shocks: GFC and COVID-19 - Trade growth decelerated after the Global Financial Crisis; growth was disproportionately concentrated in 1986-2008. - COVID-19 impacts: - World merchandise trade projected to fall by 9 percent in 2020 (WTO Trade Forecast, October 2020). - Services trade expected to plummet due to transport and travel restrictions. - Global foreign direct investment flows fell by 49 percent in the first half of 2020 (UNCTAD October 2020). - A further additional decline of 5-10 percent for 2021 (UNCTAD 2020) is likely to exacerbate contraction in trade flows. - A 2021 recovery in trade is expected, depending on outbreak duration and policy responses. ### Digital technologies, services trade, and projections - Three trends likely to affect services trade: (i) generally lower trade costs due to digital innovation; (ii) reduced need for face-to-face interaction; (iii) lowering of policy barriers. - WTO Global Trade Model projects the services sector share of global trade may grow by 50 percent by 2040 (World Trade Report 2019). - Technological changes may increase trade in time-sensitive, certification-intensive, contract-intensive, and customizable goods, while 3D printing may extend declines in trade of certain digitizable goods. - Digital platforms and sharing-economy models could affect trade in durable consumer goods and create new service provision channels. ### Aggregate theoretical effects of trade - Standard trade theories summarized: - Ricardo (1817): gains from specialization under costless labor reallocation. - Heckscher-Ohlin / Stolper-Samuelson: owners of abundant factors benefit; returns to abundant factor rise, implying inequality falls in developing economies and rises in advanced economies under certain conditions. - Krugman (1981): economies of scale and product differentiation increase variety and welfare. - Melitz (2003): more productive firms export, raising within-industry productivity and increasing within-industry inequality. - Imperfect labor mobility and labor-market frictions can cause transitional unemployment and persistent regional disparities. ### Empirical evidence on aggregate net benefits - Trade openness correlations: - An increase in trade openness of 1 percent of GDP is associated with 2-6 percentage points higher per capita GDP. - Countries that liberalized in the 1980s and 1990s achieved higher growth (1.5 percentage points) than countries that did not liberalize (Wacziarg and Welch, 2008; Estevadeordal and Taylor, 2013). - Productivity and productivity channels: - Trade liberalization increases industry productivity via reallocation and within-firm improvements (Harrison and Rodriguez-Clare (2010); De Loecker and Goldberg (2014); Melitz and Redding (2014)). - Examples: Canada-US FTA raised productivity in Canadian export and import-competing sectors (Trefler, 2004); Brazil’s trade reforms in 1988-90 improved industry productivity (Ferreira and Rossi, 2003). - Prices, variety, and welfare for the poor: - Poor households spend a higher share on tradable goods; one study estimates welfare gains of 63 percent for the poorest 10th percentile of the income distribution (Faijgelbaum and Khandelwal, 2016). - Removing trade barriers in Kenya’s concentrated sugar market could bring 40,000 families out of poverty (Argent and Begazo, 2015). - Replacing Nigeria’s import bans with an average level of tariffs could allow 3.3 million people to escape poverty (Cadot and others, 2018). - Trade openness associated with poverty reduction on average, mediated by growth and institutions; increases in real incomes of the poorest quintile are strongly correlated with increases in trade openness (IMF-WB-WTO, 2017). ### Distributional effects and inequality (aggregate evidence) - Panel regression findings: - Trade openness reduces inequality in EMDEs and has an insignificant impact in AEs (Beaton, Cebotari, and Komaromi (BCK), 2017; Jaumotte, Lall, and Papageorgiou (JLP), 2013). - Cerdeiro and Komaromi (2020): a one-percentage point higher openness is associated with a 0.2-0.6 points lower net Gini coefficient; positive impact of trade on income is highest for the poorest income deciles. - Trade impacts depend on macroeconomic context (e.g., current account deficits, fiscal deficits) and cyclicality; Germany’s overall current account surplus appears to have protected manufacturing jobs despite import competition. ### Gender, employment, and trade - Trade substantially improves economic outcomes for women: - Example: Republic of Korea female share in manufacturing rose from 6 percent in the 1970s to 30 percent in the 1990s. - Open economies have lower informality and higher gender equality, including smaller gender wage gaps (Black and Brainerd, 2004; Klein and others, 2010). - Exporting firms employ substantially more women than non-exporting firms (WB and WTO, 2020). - Trade-induced female employment increases bargaining power, delays marriage, and raises investments in education (example: young girls in villages exposed to the export-intensive garment sector gained an additional 1.5 years of schooling). - Digital trade, e-commerce, and blockchain may particularly enable women-owned MSMEs (Bahri, 2020; World Bank, 2020; AliResearch, 2017). - A challenge in GVCs is to ensure women access high-skill tasks; tech-related jobs remain male-dominated (7.6 percent on average). ### Relative impacts and adjustment dynamics - Gains are uneven across sectors, firms, regions, and workers; some groups incur absolute losses, especially in contracting industries in AEs. - Adjustment is slow because of limited geographic mobility, retraining costs, and information frictions; regional shocks can have persistent long-term effects (Dix-Carneiro and Kovak, 2015). - Trade and technological change produce similar distributional dislocations; prolonged unemployment from import competition has long-term adverse effects on health and education (Pierce and Schott, 2016; Autor and others, 2015). ### Impact and adjustment in Advanced Economies (AEs) - “China shock” evidence: - Autor et al. (2013) found rapid growth in Chinese manufacturing exports post-2001 had large negative impacts on exposed U.S. industries and communities; estimated to account for about one-quarter of U.S. manufacturing job losses in some interpretations. - Subsequent work finds trade's contribution to manufacturing employment decline in AEs is very small when accounting for exports, input-output linkages and value-added trade (Magyari, 2017; Feenstra, Ma, and Xu, 2017; Feenstra and Sasahara, 2017). - Local variation: export-expanding or cheaper-input areas experience wage and employment growth; import-competing areas fall behind. - Employment declines more in less productive firms facing import competition (Bernard, Jensen, and Schott, 2006; Trefler, 2004). - Technology is a more important driver of wage inequality than trade in many studies. - Offshoring and GVCs: offshoring increased skilled wages and decreased unskilled wages in some studies (Hummels et al., 2014); technology remains a key driver of job polarization (Autor et al., 2015; Zhu, 2017). - General equilibrium offsets: U.S. job losses from import competition roughly offset by job gains from merchandise export growth during 1991-2011 (Feenstra, Ma, and Xu, 2017); U.S. service sector exports generated a few million jobs (Feenstra and Sasahara, 2017). ### Impact and adjustment in EMDEs - Geographic concentration of adverse impacts: import-competing districts saw worse poverty outcomes after tariff reductions (Topalova, 2010; Baldarrago and Salinas, 2017). - Inter-regional labor mobility is very low in EMDEs (example: less than 1 percent of rural Indians and 5 percent of urban Indians moved across districts for jobs in the 1980s and 1990s (Topalova, 2010)). - Export-oriented regions benefit significantly: - Vietnam’s bilateral trade agreement with the US led to very large regional poverty reductions; provinces with largest tariff reductions experienced fast wage growth for low-education workers and reductions in child labor (McCaig, 2011). - Mexican regions exposed to NAFTA and Chinese exposure produced faster wage growth in export-benefiting locations (Chiquiar, 2008; Erten and Leight, 2017). - Informality and SMEs: - Direct exports represent just 7.6 percent of total sales of SMEs in the manufacturing sector (text ends here). - Indirect exports (supply to domestic exporters) for manufacturing SMEs account for 2.4 percent of total sales, compared to 12.6 percent for large manufacturing enterprises. - Among developing regions, Africa has the lowest export share at 3 percent, compared to 8.7 percent for developing Asia. - Online platforms: 97 percent of eBay-enabled small firms export (eBay, 2012; 2014; 2016). - Empirical findings on trade’s effect on informality are mixed (McCaig and Pavcnik, 2018; Paz, 2014; Aleman-Castilla, 2006; Goldberg and Pavcnik, 2003; Dix-Carneiro and Kovak, 2019; Erten et al., 2019; McCaig and McMillan, 2020). - Wage inequality and firm effects: - Wage inequality increased after some liberalization episodes (example: Colombia in the 1990s). - Exporting to high-income countries induces quality upgrading, raising demand for skilled labor (Verhoogen, 2008; Brambilla, Lederman, and Porto, 2012). - Much wage inequality occurs between firms; larger, more productive, exporting firms pay higher wages (Helpman, Itskhoki, Muendler, and Redding, 2017). - Trade contributed substantially to poverty reduction in EMDEs overall; outward-oriented Asian countries achieved large reductions in severe poverty over decades. ### Trade costs, barriers, and facilitation - Tariff barriers are inversely related to income and are higher for women and rural/informal workers (Mendoza, Nayyar and Piermartini, 2018). - India example: a pink tariff gap of 6-percentage points exists between what women pay and what men pay (Mendoza, Nayyar and Piermartini, 2018). - Sanitary and phytosanitary standards raise production costs and impede market access for poor farmers. - Trade facilitation benefits perishable goods and is particularly important for poor producers and women, who face greater time costs at borders (WB-WTO, 2018 and 2020). - Fixed trade costs and lack of information disproportionately hinder SMEs (WTO, 2016; Fontagné, Orefice and Piermartini, 2020). - Trade Facilitation Agreement (TFA) potential: - Full TFA implementation could reduce global trade costs by an average of 14 percent (WTO, 2015) and up to 23 percent (Moise and Sorescu, 2013). - Low and lower-middle income countries are likely to see the biggest reduction in trade costs (Teh, Smeets, Sadni Jallab, and Chaudri, 2016). - Developing countries implementing the TFA have a significantly higher forecast of exports growth between 2015-2030 (Figure 11 reference). ### Technology, digital trade, and prerequisites - Technological innovation projected to increase global trade growth by an average of 2 percentage points per year between now and 2030, with higher growth for developing countries and services exports (Bekkers et al, 2021). - Digital trade can support inclusive growth if infrastructure, IT facilitation, transaction-cost reduction, domestic regulatory systems, and international harmonization are addressed (Smeets, 2021). - Key domestic prerequisites: - Address data inadequacy. - Reduce uneven and costly digital connectivity. - Reform education to prepare entrepreneurs and workers for in-demand jobs. - Establish an effective legal and regulatory framework and a commercial environment that is trade- and investment-friendly. ### Trade agreements, inclusiveness, and environment - Increasing number of RTAs include provisions on human rights, sustainable development, gender equality, and SME participation; provisions often promote cooperation, monitoring, and capacity-building. - Evidence on effectiveness of inclusiveness-related RTA provisions is limited and largely anecdotal due to lack of disaggregated data. - Trade policy can support environmental goals via tariff reductions on green goods, phasing out fossil-fuel subsidies, carbon pricing, border carbon adjustments, and green procurement. ### Multilateral cooperation and accession effects - WTO accession lowered protection and expanded trade opportunities over the past 20 years. - Acceding members’ trade grew almost double that of original members (12½ percent versus 7½ percent), including after the 2008 global financial crisis. - Accession requires norms and institutions that increase transparency, promote the rule of law, and harmonize best practices (Bacchetta, Drabek, 2002). ### Policy recommendations — Trade-related policies - Lower tariffs and non-tariff barriers to reduce trade costs and enable participation in global value chains, especially for low-income countries where trade can create jobs for the poor. - Reduce border and behind-the-border barriers that disproportionately affect women, rural populations, and informal-sector workers. - Facilitate import procedures for seeds and fertilizers and improve access to services that are key production inputs (WTO, 2019). - Implement trade facilitation to reduce transaction costs; full TFA implementation has large potential trade-cost reductions. - Use advanced announcements and gradual phasing of liberalization to ease labor-market bottlenecks where appropriate; weigh phased approaches against costs of delaying benefits. - Consider temporary import safeguards cautiously, accounting for adverse downstream effects and consumer costs. - Include inclusiveness-related provisions in RTAs (labor standards, gender-related policies, SME access to trade information) while strengthening monitoring and data collection. - Align trade policy with environmental objectives (tariff reductions for green goods, phasing out fossil-fuel subsidies, climate policy coordination). - Invest in digital infrastructure, regulatory frameworks, and education to enable digital trade benefits. ### Policy recommendations — Adjustment policies - Provide a mix of active and passive labor market policies: unemployment benefits, social insurance, training, wage subsidies, and wage insurance. - Tailor programs to country context and rigorously evaluate policies as implemented; evidence suggests no one-size-fits-all solution. - Consider place-based policies to increase geographic mobility and support lagging regions: public investment in infrastructure and communications, regionally focused public-investment projects, relocation of government agencies, and location-specific tax and regulatory incentives. - General adjustment policies may be more effective than trade-specific programs given shock propagation through GVCs and attribution difficulties. - Improve accessibility, flexibility, and supportiveness of trade adjustment assistance programs: - U.S. Trade Adjustment Assistance (TAA): mixed evidence; training generally beneficial; TAA helps in the short term but skills can become obsolete over 10 years (Hyman, 2018). - EU European Globalization Adjustment Fund (EGF): current annual budget €150 million versus €12 billion for the European Social Fund (ESF); EGF helped only about 4 percent of workers adversely affected by globalization between 2007 and 2016; reasons include high eligibility threshold (500 workers), slow administrative process (up to 12 months), and co-financing rate of 60 percent. ### Policy recommendations — Complementary policies - Address behind-the-border constraints: improve access to finance, education, and technology for the poor, women, and SMEs. - Close the gender digital divide: women's internet access remains significantly lower than men's in developing countries. - Strengthen data collection (disaggregated by gender and firm size) to assess inclusiveness provisions and target policies effectively. - Prioritize education, training, and skills relevant across industries to increase worker flexibility as global value chains shift. - Promote more inclusive management organizations in GVCs to enable women’s access to high-skill tasks and occupations. - Reduce domestic market frictions and enhance competition in distribution to increase tariff pass-through and ensure price benefits reach the poorest. ### Conclusions — trade and inclusive growth - International trade is strongly associated with improvements in inclusive growth. - Empirical literature finds trade integration increases growth and, in EMDEs, lowers inequality at the aggregate level. - Trade improves productivity, contributes to knowledge diffusion and innovation, incentivizes skill accumulation, and increases product variety while reducing prices. - Heterogeneous effects persist: - Regions, industries, and firms exposed to import competition suffer relative declines. - Export-oriented regions and firms experience relative improvements. - Beneficial effects for export-oriented areas generally outweigh losses from import competition at the aggregate level. - Macroeconomic stability and sound fiscal positions are critical to reduce adjustment costs and share trade benefits broadly. *Source: wpiea2021074-print-pdf - 7. Change in Openness and Income of the Poor (excerpt).* ### 7. Change in Openness and Income of the Poor.............................................................. 14 ### 7. Change in Openness and Income of the Poor.............................................................. 14 ### Trade and inclusion concerns - Inequality and trade have both increased in many developed and developing countries since 1990. - Over the past few decades, inequality has risen in most advanced countries and in several developing and emerging economies, especially in Eastern Europe and Asia. - Trade openness expanded until the Global Financial Crisis, driven in part by trade liberalization and integration from emerging market countries such as China. - Political and public reactions tied to trade include: - Brexit. - Trade tensions between the U.S. and China. - The U.S. withdrawal from the Trans-Pacific Partnership. - Other increases in protectionism and a rise in economic nationalism. - Other forces besides trade contributed to rising inequality, notably technological advances (reference to Cerra et al. (2021)). - Public perceptions of trade are correlated with country economic performance: - Pew Research Center’s Spring 2018 Global Attitudes Survey shows a high correlation between the country’s GDP growth rate and the belief that trade will increase wages. - Most people consider trade to be good for their countries and to create employment opportunities, with somewhat more optimism in emerging countries. - Individuals with higher education and above median incomes are more likely to think trade creates jobs. ### Historical and recent international trade trends - Trade growth and historical drivers: - Trade grew by over 300 percent between 1870 and the start of WWI due to declining trade and communication costs prompted by technological innovations such as the steam ship and telegraph. - Trade collapsed during the two world wars and the Great Depression, due to conflict disruptions, weak economic conditions, and a rise in protectionism (e.g., Smoot Hawley Act). - Trade volumes surged by 7 percent per annum from 1950 to a high of roughly 60 percent of GDP (summing exports and imports) by the 2008-09 Global Financial Crisis (GFC). - Drivers in the post-war period: - Technological change reduced transportation and communication costs (e.g., containerization). - High-income countries reduced tariffs to less than 5 percent by the 1980s in early GATT rounds. - Developing countries undertook major unilateral liberalizations in the 1980s and 1990s. - Regional trading agreements and arrangements proliferated since the 1980s (examples include the European Union, NAFTA, ASEAN). - Changes in country and industry composition of trade: - In the early 1990s, merchandise trade between advanced countries comprised about 2/3 of global trade; this share fell to about 1/3 as trade between emerging market and developing economies (EMDEs) and advanced economies (AEs) increased sharply. - China’s accession to WTO led to rising shares from Asian countries in the 2000s. - China’s share of world merchandise exports grew from 1.2 percent in 1983 to 13.1 percent in 2018. - Asia’s share in world merchandise exports grew from 19.1 percent to (text cut off in source). ### Public perception and political economy - In many (mostly rich) countries, trade and trade agreements have been blamed for manufacturing job losses and for harming the poor; such views may reflect broader dissatisfaction with slower growth in advanced economies, particularly after the global financial crisis. - Perceived impacts of trade became more favorable in the second half of the 2010s (Antras, 2020). - Survey evidence: - Public views on trade depend on economic performance; there is a high correlation between GDP growth and the belief that trade increases wages. - Most people view trade as creating jobs and being beneficial for their country, with greater optimism in emerging countries. - Higher-education and higher-income individuals are more likely to view trade positively with respect to job creation. ### Framing of the paper and policy focus - The paper examines the relationship between international trade and inclusive growth, defining inclusion broadly to encompass outcomes across the socio-economic spectrum. - Analytical steps outlined: - Describe underlying trends driving trade and its composition historically and as projected into the future. - Assess trade’s relationship with growth and inclusion in theoretical and empirical literature. - Evaluate the relative impact of trade on different population segments within countries. - Discuss scope to reduce non-tariff barriers and other trade costs despite past tariff reductions. - Delve into policy design debates to reap advantages of integration while minimizing or compensating adverse impacts on sub-groups. *Source: wpiea2021074-print-pdf - 7. Change in Openness and Income of the Poor.............................................................. 14* ### 33.6 percent in the same period. During this period, EMDEs have expanded their share of ### wpiea2021074-print-pdf - 33.6 percent in the same period. During this period, EMDEs have expanded their share of ### Recent global trade trends and composition - Global value chains (GVCs) rose from about 37 percent of total trade in 1970 to above 50 percent by the mid-2000s (WDR2020). - Trade in services expanded faster than trade in goods between 2005 and 2017, at 5.4 percent per year on average, and now accounts for about one-quarter of total trade (IMF-WB-WTO, 2018). - The value of e-commerce transactions is estimated at US$27.7 trillion in 2016, up 44 percent from 2012 (USITC 2017; WTO, 2018). - International streaming revenue for Netflix grew from US$ 4 million to US$ 5 billion between 2010 and 2017 (WTO, 2018). ### Short-term shocks: Global Financial Crisis and COVID-19 impacts - Trade growth was disproportionately concentrated in the period 1986-2008; trade growth decelerated dramatically following the Global Financial Crisis. - Due to the COVID-19 pandemic: - World merchandise trade is projected to fall by 9 percent in 2020 (WTO Trade Forecast, October 2020). - Services trade expected to plummet due to transport and travel restrictions. - Global foreign direct investment flows fell by 49 percent in the first half of 2020 (UNCTAD October 2020). - A further additional decline of 5-10 percent for 2021 (UNCTAD 2020) is likely to exacerbate contraction in trade flows. - A 2021 recovery in trade is expected, depending on the duration of the outbreak and the effectiveness of policy responses. ### Digital technologies, services trade, and future projections - Three main trends likely to affect services trade: (i) generally lower trade costs due to digital technological innovation; (ii) a reduced need for face-to-face interaction; and (iii) a lowering of policy barriers. - WTO Global Trade Model simulations project that, as a result of these trends, the services sector share of global trade may grow by 50 percent by 2040 (World Trade Report 2019). - Digital technologies may foster trade in time-sensitive goods, certification intensive goods and contract intensive goods, increase trade in customizable goods, and potentially extend the decreasing trend in trade of certain digitizable goods due to 3D printing. - Digital platforms and the sharing-economy business model could affect trade in durable consumer goods; e-commerce and digital trade create new service provision channels. ### Aggregate impact of trade on growth and inclusion — theory - Standard trade theories predict: - Gains from specialization (Ricardo, 1817) with assumption of costless labor reallocation. - Heckscher-Ohlin logic: owners of a country’s abundant factors benefit; Stolper-Samuelson implies returns to abundant factor rise, suggesting inequality falls in developing economies and rises in advanced economies under certain conditions. - New trade theory (Krugman, 1981): economies of scale and product differentiation provide competition and product variety gains. - “New new” trade theory (Melitz, 2003): more productive firms export, leading to within-industry productivity gains and rising within-industry inequality. - Imperfect labor mobility and labor-market frictions can produce transitional unemployment and persistent regional disparities. ### Empirical evidence for aggregate net benefits of trade - Trade openness is positively correlated with per capita income and economic growth; studies find: - An increase in trade openness of 1 percent of GDP is associated with 2-6 percentage points higher per capita GDP. - Countries that liberalized trade in the 1980s and 1990s achieved higher growth (1.5 percentage points) than countries that did not liberalize (Wacziarg and Welch, 2008; Estevadeordal and Taylor, 2013). - Trade increases productivity and innovation: - Trade liberalization increases industry productivity via reallocation and within-firm improvements (Harrison and Rodriguez-Clare (2010); De Loecker and Goldberg (2014); Melitz and Redding (2014)). - Examples: Canada-US FTA raised productivity in Canadian export and import-competing sectors (Trefler, 2004); trade reforms in Brazil during 1988-90 improved industry productivity (Ferreira and Rossi, 2003). - Trade openness appears correlated with slightly higher employment in the long run; cross-country studies find trade openness reduces long-run unemployment (Dutt et al., 2009; Felbermayr et al., 2009). - Trade liberalization leads to lower prices and greater variety: - Poor households spend a higher share on tradable goods; one study estimates welfare gains of 63 percent for the poorest 10th percentile of the income distribution (Faijgelbaum and Khandelwal, 2016). - Removing trade barriers in Kenya’s concentrated sugar market could bring 40,000 families out of poverty (Argent and Begazo, 2015). - Replacing Nigeria’s import bans with an average level of tariffs could allow 3.3 million people to escape poverty (Cadot and others, 2018). - Trade openness is associated with poverty reduction on average, mediated by growth and institutions; increases in real incomes of the poorest quintile are strongly correlated with increases in trade openness (IMF-WB-WTO, 2017). ### Distributional effects and inequality - Panel regressions show trade openness reduces inequality in EMDEs and has an insignificant impact in AEs (Beaton, Cebotari, and Komaromi (BCK), 2017; Jaumotte, Lall, and Papageorgiou (JLP), 2013). - Cerdeiro and Komaromi (2020) find a one-percentage point higher openness is associated with a 0.2-0.6 points lower net Gini coefficient; positive impact of trade on income is highest for the poorest income deciles. - Trade's impact depends on macroeconomic context (e.g., current account deficits, fiscal deficits) and cyclicality; Germany’s overall current account surplus appears to have protected manufacturing jobs despite import competition. ### Gender and trade - Trade substantially improves economic outcomes for women: - Trade-driven specialization likely contributed to increased female labor force participation in developing countries (example: Republic of Korea female share in manufacturing rose from 6 percent in the 1970s to 30 percent in the 1990s). - Open economies have lower rates of informality and higher gender equality, including smaller gender wage gaps (Black and Brainerd, 2004; Klein and others, 2010). - Firms that engage in international trade employ substantially more women than non-exporting firms (WB and WTO, 2020). - Trade-induced female employment increases female bargaining power, delays marriage, and increases investments in education (example: young girls in villages exposed to the export-intensive garment sector gained an additional 1.5 years of schooling). - Digital trade, e-commerce, and blockchain may particularly enable women-owned MSMEs and reduce barriers to international participation (Bahri, 2020; World Bank, 2020; AliResearch, 2017). ### Relative impacts and adjustment dynamics - Gains from trade are uneven across sectors, firms, regions, and workers; some groups incur absolute losses, especially in contracting industries in AEs. - Adjustment is often slow due to limited geographic mobility, retraining costs, and information frictions; regional shocks can have persistent long-term effects (Dix-Carneiro and Kovak, 2015). - Trade and technological change produce similar distributional dislocations; prolonged unemployment from import competition has long-term adverse effects on health and education (Pierce and Schott, 2016; Autor and others, 2015). ### Impact and adjustment in advanced economies (AEs) - The “China shock” literature: - Autor et al. (2013) found rapid growth in Chinese manufacturing exports post-2001 had large negative impacts on exposed U.S. industries and communities; estimated to account for about one-quarter of U.S. manufacturing job losses in some interpretations. - Subsequent work accounting for exports, input-output linkages and value-added trade finds trade's contribution to manufacturing employment decline in AEs is very small (Magyari, 2017; Feenstra, Ma, and Xu, 2017; Feenstra and Sasahara, 2017). - Local effects vary: areas benefiting from export expansion or cheaper inputs experience wage and employment growth; import-competing areas fall behind. - Employment declines more in less productive firms when facing import competition (Bernard, Jensen, and Schott, 2006; Trefler, 2004). - Trade’s contribution to rising skill premium and wage dispersion is modest relative to technological change; studies attribute larger shares of wage inequality to technology rather than trade. - Offshoring and GVCs: - Offshoring increased wages of skilled workers and decreased wages of unskilled workers in some studies (Hummels et al, 2014). - Technology remains a more important driver of job polarization than offshoring in many analyses (Autor et al., 2015; Zhu, 2017). - General equilibrium offsets: - Job losses from import competition were roughly offset by job gains due to merchandise export growth in the US during 1991-2011 (Feenstra, Ma, and Xu, 2017). - U.S. service sector exports generated a few million jobs, contributing to net job gains (Feenstra and Sasahara, 2017). ### Impact and adjustment in emerging market and developing economies (EMDEs) - Adverse impacts are geographically concentrated; import-competing districts saw worse poverty outcomes after tariff reductions (Topalova, 2010; Baldarrago and Salinas, 2017). - Inter-regional labor mobility is very low in EMDEs; example figures: - Less than 1 percent of rural Indians and 5 percent of urban Indians moved across districts for jobs in the 1980s and 1990s (Topalova, 2010). - Regions with export-oriented industries benefit significantly: - Vietnam’s bilateral trade agreement with the US led to very large regional poverty reductions; provinces with largest tariff reductions experienced fast wage growth for low-education workers and reductions in child labor (McCaig, 2011). - Mexican regions exposed to NAFTA and Chinese exposure produced faster wage growth in export-benefiting locations (Chiquiar, 2008; Erten and Leight, 2017). - Informality: - Direct participation of SMEs in international trade is low; direct exports represent just 7.6 percent of total sales of SMEs in the manufacturing sector (text ends here). - Empirical findings on trade’s effect on informality are mixed: some studies find trade opening reduces informal employment (McCaig and Pavcnik, 2018; Paz, 2014; Aleman-Castilla, 2006), others find no effect or increases in informality (Goldberg and Pavcnik, 2003; Dix-Carneiro and Kovak, 2019; Erten et al., 2019; McCaig and McMillan, 2020). - Wage inequality and skill premium: - Wage inequality increased after some liberalization episodes; example: Colombia in the 1990s saw wages fall in industries with larger tariff reductions, contributing to a marginal rise in wage inequality (Attanasio, Goldberg, Pavcnik, 2004; Goldberg and Pavcnik, 2005). - Trade has been associated with rising skill premia in many EMDEs, linked to technological adoption, capital inflows, and export upgrading to high-income destinations. - Exporting to high-income countries induces quality upgrading, raising demand for skilled labor and contributing to higher wage inequality (Verhoogen, 2008; Brambilla, Lederman, and Porto, 2012). - Much of wage inequality occurs between firms; larger, more productive, exporting firms pay higher wages and drive between-firm wage dispersion (Helpman, Itskhoki, Muendler, and Redding, 2017). - Trade has contributed substantially to poverty reduction in EMDEs overall, though distributional outcomes depend on sectoral patterns and mobility costs; outward-oriented Asian countries achieved large reductions in severe poverty over decades. *Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021074-print-pdf.pdf* ### 14.1 percent for large manufacturing enterprises. Among developing regions, Africa has the ### wpiea2021074-print-pdf - 14.1 percent for large manufacturing enterprises. Among developing regions, Africa has the ### SME participation in trade and GVCs - Export share: "Africa has the lowest export share at 3 percent, compared to 8.7 percent for developing Asia." - Indirect exports (supply to domestic exporters) for manufacturing SMEs account for "2.4 percent of total sales, compared to 12.6 percent for large manufacturing enterprises." - Online platforms show much higher SME export participation: "the vast majority of eBay-enabled small firms export – 97 percent (eBay, 2012; 2014; 2016)." - Most manufacturing SMEs have both low forward and backward GVC participation rates compared to large enterprises (WTO, World Trade Report 2016). ### Trade, structural transformation, and distributional impacts - Trade enables structural transformation (migration from agriculture to manufacturing) and contributes to wage increases, innovation, technology adoption, and product quality upgrading. - Historical example: export-led growth contributed to China’s extraordinary growth and poverty reduction, but with mixed inclusive growth effects—rising manufacturing wages while many were left behind in agriculture, increasing inequality (Lewis, 1955; Kuznets, 1955). - Uneven global effects: rising manufacturing competitiveness of Asian exporters occurred "largely at the expense of developing countries in other regions, especially Latin America and Africa," with possible "premature deindustrialization" (Rodrik, 2015). - Services tradability has been increasing, creating new export opportunities (Antras, 2020). ### Key findings on trade costs and barriers - Tariff barriers are inversely related to income and are higher for women and rural/informal workers (Mendoza, Nayyar and Piermartini, 2018). - India example: "a pink tariff (the gap between what women pay and what men pay) exists of 6-percentage points (Mendoza, Nayyar and Piermartini, 2018)." - Sanitary and phytosanitary standards and other requirements increase production costs and impede market access for poor farmers. - Trade facilitation benefits perishable goods and is particularly important for poor producers and women, who face greater time costs at borders (WB-WTO, 2018 and 2020). - Fixed trade costs and lack of information on foreign networks, regulations and standards disproportionately hinder SMEs (WTO, 2016; Fontagné, Orefice and Piermartini, 2020). ### Trade Facilitation Agreement (TFA) and trade-cost reduction - Full implementation of the TFA could reduce global trade costs by "an average of 14 percent (WTO, 2015) and up to 23 percent (Moise and Sorescu, 2013)." - Low and lower-middle income countries are likely to see the biggest reduction in trade costs (Teh, Smeets, Sadni Jallab, and Chaudri, 2016). - Developing countries implementing the TFA have a significantly higher forecast of exports growth between 2015-2030 (Figure 11 reference). ### Technological and digital trade impacts - Technological innovation (robotization, artificial intelligence, servicification, online markets/platforms) projected to "increase global trade growth by an average of 2 percentage points per year between now and 2030, with higher growth for developing countries and services exports (Bekkers et al, 2021)." - Digital trade can support inclusive growth if infrastructure, IT facilitation, transaction-cost reduction, domestic regulatory systems, and international harmonization are addressed (Smeets, 2021). - Key domestic prerequisites: address data inadequacy; reduce uneven and costly digital connectivity; reform education to prepare entrepreneurs and workers for in-demand jobs and the workplace of the future. - Two prerequisites for leveraging digital technologies: "an effective legal and regulatory framework and a commercial environment that is both trade- and investment-friendly." ### Trade agreements, inclusiveness provisions, and environmental clauses - An increasing number of RTAs include provisions on human rights, sustainable development, gender equality, and SME participation; provisions vary and often promote cooperation activities, monitoring, and capacity-building. - Evidence on the effectiveness of inclusiveness-related RTA provisions is limited and largely anecdotal due to lack of disaggregated data (e.g., by gender and firm size). - Some RTAs contain binding environmental commitments; trade policy can support environmental goals via tariff reductions on green goods, regulatory standards, phasing out fossil-fuel subsidies, carbon pricing, border carbon adjustments, and green procurement. ### Multilateral cooperation and accession effects - WTO accession has lowered protection and expanded trade opportunities over the past 20 years (WTO, 2015). - Acceding members’ trade grew "almost double that of original members (12½ percent versus 7½ percent)," including after the 2008 global financial crisis. - Accession requires norms and institutions that increase transparency, promote the rule of law, and harmonize best practices (Bacchetta, Drabek, 2002). ### Policy recommendations — Trade-related policies - Lower tariffs and non-tariff barriers to reduce trade costs and enable participation in global value chains, especially for low-income countries where trade can create jobs for the poor. - Reduce border and behind-the-border barriers that disproportionately affect women, rural populations, and informal-sector workers. - Facilitate import procedures for seeds and fertilizers and improve access to services that are key production inputs (WTO, 2019). - Implement trade facilitation to reduce transaction costs; full TFA implementation has large potential trade-cost reductions. - Use advanced announcements and gradual phasing of liberalization to ease labor-market bottlenecks where appropriate; weigh phased approaches against costs of delaying benefits. - Consider temporary import safeguards cautiously, accounting for adverse downstream effects and consumer costs. - Include inclusiveness-related provisions in RTAs (labor standards, gender-related policies, SME access to trade information) while strengthening monitoring and data collection. - Align trade policy with environmental objectives (tariff reductions for green goods, phasing out fossil-fuel subsidies, climate policy coordination). - Invest in digital infrastructure, regulatory frameworks, and education to enable digital trade benefits and prevent developing countries from falling further behind. ### Policy recommendations — Adjustment policies - Provide a mix of active and passive labor market policies to lower adjustment costs: unemployment benefits, social insurance, training, wage subsidies, and wage insurance. - Evidence suggests no one-size-fits-all solution; tailor programs to country context and rigorously evaluate policies as implemented. - Consider place-based policies to increase geographic mobility and support lagging regions: public investment in infrastructure and communications, regionally focused public-investment projects, relocation of government agencies, and location-specific tax and regulatory incentives. - General adjustment policies may be more effective than trade-specific programs given the spread of shocks through global value chains and the difficulty of attributing workers’ losses solely to trade. - Improve accessibility, flexibility, and supportiveness of trade adjustment assistance programs (less restrictive eligibility, shorter deadlines, simpler application processes) — lessons from U.S. Trade Adjustment Assistance (TAA) and EU European Globalization Adjustment Fund (EGF). - U.S. TAA: mixed evidence; training generally beneficial; TAA helps in the short term but skills can become obsolete over 10 years (Hyman, 2018). - EGF: current annual budget "€150 million" versus "€12 billion" for the European Social Fund (ESF); EGF helped "only about 4 percent of workers adversely affected by globalization between 2007 and 2016"; reasons include high eligibility threshold ("500 workers"), slow administrative process ("up to 12 months"), and co-financing rate of "60 percent." ### Policy recommendations — Complementary policies - Address "behind the border" constraints: improve access to finance, education, and technology for the poor, women, and SMEs. - Close the gender digital divide: women's internet access remains significantly lower than men's in developing countries (text ends noting this disparity). - Strengthen data collection (disaggregated by gender and firm size) to assess inclusiveness provisions and target policies effectively. - Prioritize education, training, and skills relevant across industries to increase worker flexibility in shifting global value chains. *Source: wpiea2021074-print-pdf* ### 7.6 percent on average) and tech-related jobs remain male-dominated. A challenge in GVCs ### V. CONCLUSIONS ### Trade and inclusive growth: empirical findings - International trade is strongly associated with improvements in inclusive growth. - Studies using a variety of methodologies find that trade integration increases growth and, in EMDEs, lowers inequality at the aggregate level. - Trade improves productivity, contributes to knowledge diffusion and innovation, incentivizes skill accumulation, and increases product variety while reducing prices. - Trade, like technological progress, has heterogeneous effects across regions, industries, firms, and workers: - Regions, industries, and firms exposed to import competition suffer relative declines in labor market conditions and other socio-economic outcomes. - Regions, industries, and firms oriented toward export opportunities experience relative improvements in labor market and socio-economic outcomes. - Studies find that the beneficial effects for export-oriented areas outweigh the losses from import competition, consistent with aggregate benefits. - Specific empirical factors affecting distribution of trade benefits: - High inland transport costs reduce the pass-through of border price changes to poor, often rural households (example: tariff pass-through was significantly higher in the Mexican states closest to the United States border) (Nicita, 2004). - Market frictions and imperfect competition can absorb tariff changes into profit margins or mark-ups (Campa and Goldberg, 2002). - Evidence of intermediaries’ market power affecting mark-ups and creating differential tariff pass-through within sub-Saharan Africa (Atkin and Donaldson, 2015). - Recessions impede re-employment following job displacement, triggering large, persistent earnings losses for affected workers (Davis and von Watcher, 2011). ### Distributional constraints and inclusiveness challenges - A challenge in GVCs is to ensure that women have better access to high-skill tasks and occupations; tech-related jobs remain male-dominated (7.6 percent on average). - Barriers preventing women from capturing full potential benefits from trade need to be lifted, and appropriate policies to deal with adjustment costs need to be put in place (World Bank and WTO, 2020). - Lack of competition in the distribution sector and high domestic transport costs can significantly limit the extent to which trade benefits reach the poor. - Farmers and firms in rural areas face particularly high transport costs and delays when shipping to international and national markets. - Workers in informal firms, women, and small businesses typically have limited access to finance, including trade finance, limiting their ability to access international markets. ### Macroeconomic context and stability - Macroeconomic stabilization policies are critical to reducing adjustment costs and sharing trade benefits. - Stable, sustainable macroeconomic policies create fiscal space for financing social insurance, education and retraining, and labor market programs. - Strong public finances—especially low fiscal deficits—can improve a country’s savings-investment position, helping avoid current account deficits that accelerate deindustrialization in AEs and invite destabilizing capital inflows in EMDEs. - Strong macroeconomic management can avoid overvalued real exchange rates that weaken trade competitiveness, reduce economic growth (Rodrik, 2008; Berg and Miao, 2010), and contribute to balance of payments crises (Kaminsky, Lizondo, and Reinhart, 1998), all of which undermine inclusive growth. ### Policy recommendations to foster more inclusive trade - Multilateral actions: - Address distortions in agriculture to improve market access and reduce food price volatility to benefit both poor farmers and poor consumers. - Reach an agreement to limit fisheries subsidies to support livelihoods of coastal communities and preservation of fish stocks (IMF, WB and WTO, 2017; 2018). - Address barriers to trade in services and e-commerce to open opportunities for MSMEs and women (WB and WTO, 2020). - Targeted domestic actions: - Improve labor mobility across sectors, regions, and skills through retraining and transition assistance for displaced workers. - Implement wide-range education policies to develop relevant skills in a rapidly changing economic and technological environment. - Use credit policies to help fund self-employment or human capital investment. - Implement housing market policies to improve geographical mobility. - Apply regional policies to help re-orient economies of harder-hit regions. - Consider redistributive policies for those who suffer long-term losses from economic change. - Institutional and organizational reforms: - Promote more inclusive management organizations in GVCs to enable women’s access to high-skill tasks and occupations. - Reduce domestic market frictions and enhance competition in distribution to increase tariff pass-through and ensure price benefits reach the poorest. *Source: Excerpt from wpiea2021074-print-pdf (pages 33–35).* ### REFERENCES ### wpiea2021074-print-pdf - REFERENCES ### Trade and Productivity / Trade and Growth - Ahn, J., Dabla-Norris, E., Duval, R., Hu, B. & Njie, L. 2016. “Reassessing the Productivity Gains from Trade Liberalization,” International Monetary Fund Working Paper No. 16/77. - Alcalá, F. & Ciccone, A. 2004. 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