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

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
competing sectors tends to lead to biased estimates, the use of partial equilibrium
analysis has the great advantage of quickly and easily identifying the individuals who
are likely to lose their jobs. The approach can thus be useful to provide guidance on
the design of trade adjustment assistance, job retraining and other forms of transfers
from the public sector.
One way to see what competition would do to employment is to ask the “dual”
question of how tariffs protect jobs in a given sector. It follows that if tariffs were removed,
the loss of jobs would be equivalent to those protected by the import tax.
Removing a tariff is thus like a “natural experiment” and may provide the best partial
equilibrium estimate of the employment-displacing effect of imports. Table 3.1 shows
an estimate of the number of jobs saved by protection (tariffs and quotas) in the
United States (US) in 1990.
3.3.1.2 Competitive and non-competitive imports
The dis tinction between competitive and non-competitive imports, while not theoretically
self-evident, makes a big difference in determining the effect of liberalization
of any particular product market. Indeed, in order to estimate how much domestic
production is replaced by imports, it is important to have an understanding of whether
and to which extent imports compete with domestic production. In this context,
“competitive” imports are imports that compete directly with domestic production
and therefore directly subtract from GDP in the aggregate demand equation. “Noncompetitive”
imports, while imports just the same, do not compete and are not a
direct substitute for any domestically produced good. In the US, only some agricultural
goods, cobalt and other rare minerals are considered non-competitive, but in developing
countries some 50-75 per cent of imports are not produced, nor have any close
local substitutes.
The impact of trade on employment, for non-competitive imports, has the opposite
sign of that of com petitive imports. As raw materials, intermediate goods, fuel
or other specialized inputs, a reduction in non-competitive imports will always reduce
GDP and employment. This is not just a generalization: any good or service that is
an input into domestic production with no viable substitute will reduce the ability
of the economy to generate employment if removed.
It follows that any partial equilibrium analysis of imports and their job-destroying
capacity must take careful account of the critical component in production plans
into which the import enters either directly or indirectly. Moreover, before policymakers
take steps to reduce imports of any good for the purposes of raising the
employment response, it is incumbent on the analyst to examine the precise nature
of the import with respect to its feasible and likely substitutes. 15
First generation partial equilibrium models tended to assume perfect substitution
between domestically produced goods and foreign imports in consumption. Those
15 There is nothing in partial equilibrium analysis that says that policy-makers cannot determine the
answer to this question, but much of economy theory holds that this information is all but impossible
for policy-makers to collect and use effectively.
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