Trade Adjustment Costs in Developing Countries: - World Bank ...

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Adjustment to Trade Policy in Developing Countries 147that the skill-intensive tasks performed in the North include fixed cost activities,such as management, research and development, and marketing, while the tasksperformed in the South involve only variable cost production activities, offshoringwill alter the relative volatility of output in the two countries. Bergin etal. (2009a) showed theoretically that a shock to, say, demand in the North willlead to greater changes in employment in the South, meaning that offshoring isassociated with the South having higher volatility. Suppose the North has a positivedemand shock, which causes local production and wages to expand. Withhigher wages in the North, firms there that previously did not offshore any productionto the South now find it profitable to do so. Adjustment in the extensivemargin of offshoring transmits the shock to the South in a powerful manner,such that employment volatility is higher in the South than in the North. Berginet al. (2009b) documented that employment volatility for maquiladoras in Mexicois greater than for the corresponding manufacturing industries in the UnitedStates, even after controlling for overall differences in the volatility of industrialproduction between the two countries. Through offshoring, shocks to US manufacturinghave a disproportionately large effect on Mexico.3. TRADE AND WAGESIn developing countries, falling trade barriers are associated with the exit of lessproductive firms, rising average industry productivity, greater fragmentation ofproduction, greater volatility of employment, and possibly more informality.What do these changes mean for wages of developing country workers? Onedownside of the failure of the simple HO model is that few alternative models givemuch in the way of general results about how trade shocks affect wages. Theoretically,a wide range of outcomes are possible; empirically, a wide range of outcomeshave been observed. Rather than attempting to catalogue all of theseoutcomes, I focus on those that are most relevant to our discussion.It is perhaps useful to begin with what we don’t know. One may expect thatchanges in the composition of firms due to trade liberalization would affect thelevel and structure of wages. However, there has been little connection betweenthe theoretical literature on firm heterogeneity and the empirical literature ontrade and wages. What might we expect to happen? As less productive and skillintensive firms exit production and more productive and skill intensive firms expand,workers who lose their jobs may see a drop in their earning power associatedwith the destruction of firm-specific human capital. In data for Mexico inthe 1980s, Revenga (1997) found that wages for manufacturing workers are positivelycorrelated with industry tariffs. As industry tariffs fall, industry wage premiado as well. Attanasio et al. (2004a) found similar evidence for Colombia;however, in a separate paper on Brazil (Attanasio et al. 2004b) they found no evidenceof changes in industry wage premia after trade reform. In the instanceswhere it does occur, declining industry average wages could reflect dislocationeffects by workers in the industry or the loss of rents, both of which could resultfrom a decline in trade protection.
148Gordon H HansonThe expansion of more efficient, skill intensive plants may increase the relativedemand for skilled labor. Theoretical research has only recently begun to addressthe issue. Helpman et al. (2008) developed a model in which trade can leadto higher wage inequality and greater unemployment in all economies (whenmoving from autarky to free trade). Their framework depends on firms being imperfectlyinformed about worker ability, and there being costly matching of workersto firms, which together generate residual wage inequality that increases asmore productive firms increase their market share following trade reform. In Indonesia,Amiti and Davis (2008) found that after trade reform, average wagesfell in import-competing industries and rose in exporting industries, which theysuggest is consistent with firm heterogeneity. Their results, however, depend onfirms setting wages according to a ‘fairness’ principle, which is untested. The bottomline is that we have strong reason to expect that firm heterogeneity will mediatethe impact of trade shocks on wages, but we do not yet know whichmechanisms for transmission of the shocks are most relevant empirically.There has been considerably more research on how the global fragmentationof production affects the wage structure (see the survey in Feenstra and Hanson,2003). Mexico’s 1980s trade reform also liberalized foreign investment, whichwas followed by an increase in the relative wage of skilled labor (Hanson andHarrison, 1999). FDI in Mexican manufacturing was concentrated in maquiladoras,many of which were created by US firms moving unskilled labor-intensiveproduction activities to Mexico. Feenstra and Hanson (1997) found that the shiftin Mexican manufacturing toward export assembly plants can account for nearlyhalf of the observed increase in the country’s demand for skilled labor (nonproductionworkers). Hsieh and Woo (2005) documented a similar phenomenon inHong Kong and China. As Hong Kong moved labor-intensive production activitiesto China in the 1980s and 1990s, the country saw an increase in the relativedemand for skill. Across Hong Kong manufacturing industries, Hsieh and Woo(2005) found a positive correlation between the nonproduction wage share andimports from China, which accounted for over half of the increase in the relativedemand for skilled workers that occurred in Hong Kong over the period.In Mexico, the effects of FDI on the wage structure appear to differ from thoseof tariff changes. Chiquiar (2008) found that during the 1990s, when the NorthAmerican Free Trade Agreement was implemented, regions of Mexico closer tothe United States enjoyed higher wage growth and a decline in the return toschooling, meaning wage inequality within these regions fell. In theory, as shownby Feenstra and Hanson (1997), it is possible for FDI and tariff reductions to affectwage inequality in an opposing manner. In related work, Hanson (2007)found that regions of Mexico with more initial FDI, more initial trade with theUnited States, and greater emigration opportunities to the United States enjoyedhigher wage growth during the 1990s.In the developing countries examined by Goldberg and Pavcnik (2007)–Argentina,Brazil, Chile, Colombia, Hong Kong, India, and Mexico—all experiencedan increase in wage inequality during the 1980s and 1990s. Which of these experiencescan be explained by trade? While offshoring appears important in Hong
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THE WORLD BANKTrade Adjustment Cost
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Trade Adjustment Costs in Developin
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Trade Adjustment Costsin Developing
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viiiContents10. Trade Adjustment an
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List of Tables2.1 Simulated Adjustm
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List of Figures2.1 Worker Flows 262
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PrefaceThe process of globalization
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2Bernard Hoekman and Guido Portopri
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4Bernard Hoekman and Guido Portoequ
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6Bernard Hoekman and Guido Portowou
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8Bernard Hoekman and Guido Portoass
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10Bernard Hoekman and Guido Portoco
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12Bernard Hoekman and Guido PortoJa
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14Bernard Hoekman and Guido Portoma
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16Bernard Hoekman and Guido Portoju
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18Bernard Hoekman and Guido Portoat
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20Bernard Hoekman and Guido PortoRE
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PART AADJUSTMENT COSTS
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26Carl Davidson and Steven Matusz2.
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28Carl Davidson and Steven Matuszne
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30Carl Davidson and Steven Matuszwh
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32Carl Davidson and Steven MatuszTa
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34Carl Davidson and Steven MatuszSo
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36Carl Davidson and Steven MatuszHi
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38Erhan Artuç and John McLarenof i
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40Erhan Artuç and John McLarenshoc
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42Erhan Artuç and John McLaren1.3
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44Erhan Artuç and John McLarenassu
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46Erhan Artuç and John McLarenin A
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48Erhan Artuç and John McLarenavai
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50Erhan Artuç and John McLarencomp
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52Erhan Artuç and John McLarenFigu
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4Reallocation and Adjustment in the
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Reallocation and Adjustment in the
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5Trade Reforms in Natural-Resource-
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Trade Reforms in Natural-Resource-A
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90Olivier Cadot, Laure Dutoit and M
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Page 120 and 121: 7Trade Reform, Employment Allocatio
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Page 161 and 162: 144Gordon H HansonOn the theory sid
Page 163: 146Gordon H Hansonberg et al. (2008
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Page 169 and 170: 152Gordon H HansonGoldberg, Pinelop
Page 172 and 173: 9Production Offshoring andLabor Mar
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Page 189 and 190: 172Pravin Krishna and Mine Zeynep S
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198Gordon H Hanson3.0%2.8%2.6%2.4%2
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200Gordon H HansonTable 12.2: Share
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202Gordon H HansonWho benefits from
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204Gordon H HansonAn older and larg
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206Gordon H HansonTo date, the lite
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208Gordon H Hansontion surplus was
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210Gordon H HansonSome evidence sug
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212Gordon H HansonBIBLIOGRAPHYAcost
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214Gordon H HansonMishra, Prachi 20
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216James Harrigan• China had been
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218James Harrigan2.2 Price and quan
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220James HarriganFigure 13.1a: Pric
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222James Harrigan4. CONCLUSIONThe e
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224Beata S Javorcikices, thus benef
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226Beata S Javorcikfor plants which
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228Beata S JavorcikAs the majority
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230Beata S Javorcik5. DOES FDI LEAD
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232Beata S Javorcikthough they do n
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234Beata S Javorcik7. FUTURE RESEAR
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236Beata S JavorcikMarkusen, James
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238Chad P Bownthese theories has on
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240Chad P Bownicy changes affect th
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242Chad P Bownis, the policy-imposi
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244Chad P Bownsignificant distortio
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246Chad P Bownaccession period led
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248Chad P Bown2002-03. 16 However,
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250Chad P Bowntive adjustment impac
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PART CFACTORS THATAFFECT TRADE
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256David Hummelsative advantage for
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258David Hummelsprices shift demand
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260David HummelsThe second form of
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262David Hummelsdogenous to how pro
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17The Duration of Trade Relationshi
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The Duration of Trade Relationships
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18Openness and Export Dynamics:New
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Openness and Export Dynamics: New r
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19Market Penetration Costs andInter
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Market Penetration Cost and Interna
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20Taking Advantage of Trade:The rol
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Taking Advantage of Trade: The role
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21Credit Constraints and the Adjust
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Credit Constraints and the Adjustme
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332Miet Maertens and Jo Swinnenmeas
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334Miet Maertens and Jo Swinnenverg
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336Miet Maertens and Jo Swinnenacti
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338Miet Maertens and Jo Swinnenfirm
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340Miet Maertens and Jo SwinnenBIBL
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342Miet Maertens and Jo SwinnenRear
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23Notes on American Adjustment Poli
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Notes on American Adjustment Polici
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362Johan F M Swinnen and Kristine V
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This book summarizes the state of k
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