Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
increase efficiency and, ultimately, the net gains from trade liberalization. 13 For
example, if a rigid labour market prevents workers moving from firms that are shrinking
due to import competition to other firms that are expanding due to improved export
opportunities, programmes that facilitate those moves may be efficiency-increasing. 14
If financial markets are weak, private investors may find it difficult to get the capital
to move into expanding sectors. Private adjustment activities that have positive externalities,
such as on-the-job learning, which cannot be fully captured by firms that
pay for them, may be subsidized to increase efficiency as well. Marcal (2001), for instance,
finds some evidence that training under the US-TAA programme increases
the re-employment rates, i.e. those trained have a higher probability to find a new
job than those not trained.
An argument for adjustment assistance linked to the equity context is the
political economy consideration by which losers of trade-policy changes would be
compensated in order to reduce opposition against that policy change. In agriculture,
for example, the Australian Government provided farmers with special retirement
schemes to compensate for losses resulting from its agricultural liberalization. The
WTO Agreement on Agriculture (AoA) explicitly exempts such retirement schemes
from reduction commitments (AoA Annex II). 15 Compensating opponents may in
some cases be the only way to achieve necessary support for policy changes. Aho
and Bayard (1984) argue that the alternative to special TAA programmes is increased
trade barriers or greater difficulty in reducing existing trade restrictions because of
the political power of the potential “losers”. Davidson and Matusz (2006) show that
an optimal way to compensate those who have to move jobs is to offer a wage subsidy
to them. 16 They also show that the optimal way to compensate losers who remain
trapped in the import-competing sector is to offer an employment subsidy. In another
paper, co-authored with Douglas Nelson (Davidson, Matusz and Nelson, 2007),
the authors show that such policies can indeed increase voters’ support for trade
liberalization.
The public debate and also the economic literature focusing on equity concerns,
though, tends to use the concept of compensation as a compensation for both the
short-run and long-run losses suffered by individuals. This debate thus goes beyond
the concept of “adjustment assistance” as it is used in this chapter. 17
13 Laird and de Córdoba (2006), p. 63.
14 See also WTO (2008), p. 154.
15 A compensation policy for cotton producers in developed countries that is not trade-distorting
could perhaps also contribute to overcome difficulties in the current Doha Round.
16 “Optimal policies” are defined here as policies that fully compensate losers while imposing the
smallest distortion on the economy.
17 Another point worth noting is the one made by Baldwin (2006), who argues that resistance against
liberalization decreases as liberalization increases since export-oriented enterprises would grow and
intensify lobbying while enterprises in sectors that are affected by import competition shrink and
lose political influence. Thus, the political economy argument is stronger for economies with
relatively high protection.
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