Distributional Effects of Trade Policy Inmaculada Martínez-Zarzoso University of Göttingen (Germany) and University Jaume I (Spain)

Outline Introduction Theories Measurement and methods Globalization versus hiperglobalization Multilateral versus bilateral trade liberalization Conclusions I. Martínez-Zarzoso

Introduction A country‘s exposure to international trade affects not only income but also the distribution of resources Distributional changes, in what direction? – Developing countries  labor abundant  better off with more trade? Evidendence indicates otherwise Increase in inequality in the last 2-3 decades in developing countries, why? Mechanisms: more exposure  impact on relative prices  impact on wages and comsumer prices, but who is affected and by how much? I. Martínez-Zarzoso

Theories 1. Trade liberalization and economic growth link 2. General equilibrium approach (Porto, 2006): trade policy affects household welfare by changing the relative prices of goods, this change affects in turn consumption and income. The model, with some added ingredients can be used to simulate trade policy changes These ingredients are: – Estimates of changes in traded good prices – Estimates of wage-price elasticities – Response of non-traded good to traded good prices I. Martínez-Zarzoso

Measurement and methods Measuring trade liberalization Direct measures: – Trade policy barriers from UNCTAD‘s TRAINS data since 1989  tariff and non-tariff barriers  main problem is lack of reporting. – Free Trade Agreements (cross-country studies) – Behind the border trade barriers from WB Indirect measures: Trade volumes (exports and imports), but not only determined by trade policy and transport cost, also endogenous variables play a role (wages, incomes...) I. Martínez-Zarzoso

Measurement and methods Measuring inequality, what to choose? skill premium, wage inequality, income inequality (Gini), consumption inequality? Income versus consumption (expenditure) data to measure inequality (to construct Gini) Expenditure data from Living Standards Measurement Surveys (LSMS), WB Why consumption is better? – Captures better life-time well-being – Income often underreported by households – Trade policy changes the purchaising power of current incomes I. Martínez-Zarzoso

Methods Porto (2006) GE Approach Differential exposure approach, Goldberg and Pavcnik (2005): within a country industries and regions are differentially exposed to trade policies: – Assumes labor is not perfectly mobile across industries – Requires much weaker identification, but partial equilibrium. Endogeneity of trade policy: double causality issues, when are liberalization episodes exogenous? I. Martínez-Zarzoso

Globalization versus hiperglobalization Why after the mid-1990s things have been different? The exposure of developing countries to international markets has increased substantially: – Decrease of trade protection – Increase share of imports and exports in GDP – Magnitude of capital flows: FDI – Exchange rate fluctuations I. Martínez-Zarzoso

Scatter plot before (top) and after (bottom) 1995 for high (left) and low (right) income countries,

I. Martínez-Zarzoso Multilateral versus bilateral trade liberalization Bilateralization of world trade: proliferation of regional/bilateral trade agreements in the 2000s Is this trend helping the poor redistributing income? Most of them 3rd generation agreements including: – Labor provisions: against “race-to-the-bottom” – Environmental provisions – Trade in services – Economic cooperation

I. Martínez-Zarzoso Evolution of Regional Trade Agreements in the world, Source:

I. Martínez-Zarzoso Evolution of Regional Trade Agreements with labour provisions, in the world,

Conclusions Evidence suggests an increase in globalization and inequality in developing countries in the recent past, is this causal? Scarce support for the premise that trade openness in developing countries would favour the poor Adjustment occurs mainly within industries,why? Perhaps labour market liberalization also needed to facilitate sectoral relocation of workers Short-run versus long-run effects, what time frame to use? I. Martínez-Zarzoso

New directions Use narrower measures of inequality Change focus from the country to the firm Heterogeneity of firms, plants, products and workers is important Use of highly disaggregated data: for plants, product lines, workers characteristics Narrower connection between theory and empirics I. Martínez-Zarzoso