Non-traded Gains From Trade - Selection in the Non-Traded Sector: Evidence from Brazil

IMF Working Papers, December 22, 2023

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Canonical URL: Non-traded Gains From Trade - Selection in the Non-Traded Sector: Evidence from Brazil

Authors: Rafael Machado Parente, Rowan Shi
Date: December 22, 2023
Core question: How do trade shocks affect allocation of labor across plants at the local labor market level?
Main contribution: Identifies a new margin for gains from trade—reallocation of labor from smaller to larger producers in the non-traded sector following import liberalization.

Context: Brazil’s import liberalization used as a quasi-natural experiment.
Key empirical facts:
- Larger non-traded producers self-select into importing in response to liberalization.
- These larger producers expand as they gain access to inputs from abroad.
- Labor reallocates from smaller to larger producers within the non-traded sector following liberalization.
Comparative result:
- The reallocation effect is welfare-enhancing when selection leads some producers to import and others not.
- The reallocation effect disappears when all nontraded producers make the same importing decision.

Model: A parsimonious model of heterogeneous producers that incorporates self-selection into importing and ensuing reallocation across non-traded producers.
Consistency: Theoretical predictions are consistent with the empirical findings.

Reallocation among non-traded producers can generate welfare gains tied to trade liberalization through:
- Selection of larger non-traded producers into importing.
- Expansion of these importing producers and labor reallocation toward them.
Implication: Heterogeneous firm responses to import liberalization matter for the distributional and aggregate welfare effects; uniform importing behavior across producers would eliminate the identified reallocation gains.