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

Reallocation and Adjustment in the Manufacturing Sector in Uruguay 67of changes as well as levels of import taxes (defined as simple averages of HarmonizedSystem items by 4-digit ISIC class). The average tariff was reduced 43per cent to 14 per cent between 1985 and 1995. On average, annual tariff changesaccelerated from −2.1 per cent before 1990 to −3.0 per cent thereafter.In all of our regressions at least one policy interaction was significant. To evaluatethe differences in adjustment with varying levels of trade liberalization wesimulated the predicted adjustment using the estimated coefficients for differentlevels of changes in tariffs (0, 2, and 4 point reductions). While we find a negligibleeffect in capital adjustment, there is a pattern for both types of labor. Forwhite collar and blue collar labor the fraction of the gap actually adjusted decreasesin the creation side, while it increases in the destruction side in the presenceof tariff reductions. For white collars this is produced by a change in theintercept, while for blue collars it is produced by a change in the slope (both statisticallysignificant).Firms in sectors that experienced higher tariff reductions could adjust a largerproportion of their surpluses than those not so exposed. For white collars thisresult is present for low levels of desired rates of growth, while for blue collarsthe effect shows for higher desired rates of change. The change in the slope forwhite collars is not statistically significant, therefore changes in this case shouldbe considered as parallel shifts. On the creation side it was the opposite: firms withlower tariff reductions adjusted a larger proportion of their shortages.When instead of using the import tax change in the firm sector we used the importtax level as a shifter of the adjustment functions, most policy interactionterms were statistically significant for blue collar and capital, while for whitecollar labor only the constant shifter for the creation side changed significantly.In this case we simulated the adjustment functions for tariff levels of 10, 20, and30 percent, and the results confirmed our previous finding: the effects of the protectionlevel were stronger for blue collar and capital than for white collar.Lower tariff levels were associated with higher adjustment on the creation side,especially for blue collar jobs but also for white collar jobs and capital. Adjustmentin the destruction side seemed not to change with tariff levels in the caseof white collar adjustment functions. For capital and blue collar labor, highertariff levels were associated with lower adjustments in the destruction side, theopposite of the creation side.A possible explanation is that protected sectors are typically less competitiveindustries prone to reduce net employment even in the presence of trade protection.It can also be an indirect way to show that protection may in fact destroyjobs, rather than create them. If shocks to firms are iid, protection will lead tolower levels of employment, and this may have to do with firms’ expectations. Ifthere is a generalized positive demand shock, a firm in a highly protected sectorwill not adjust completely in the presence of adjustment costs and so on (firingworkers) unless the government has credibly committed to maintain protection.If there is any risk that the tariff will go down, the firm may be more reluctantto hire more workers than a similar firm in another sector not exposed to the riskof the government reducing tariffs. The same applies to the job destruction side.