Distributional Effects of Trade Policy

Inmaculada Martínez-ZarzosoUniversity of Göttingen (Germany)

and University Jaume I (Spain)

I. Martínez-Zarzoso

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 changesThese 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

• Scatter plot before (top) and after (bottom) 1995 for high (left) and low (right) income countries, 1960-2009

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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, 1948-2012

Source: http://www.wto.org/english/tratop_e/region_e/regfac_e.htm

I. Martínez-Zarzoso

1996 1998 2000 2002 2004 2006 2008 2010 2012 20140

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Evolution of Regional Trade Agreements with labour provisions, in the world, 1997-2012

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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