Emerging evidence from developing countries shows mixed effects of trade on local labor markets. Some sectors have experienced significant losses due to greater import competition. Evidence from Brazil, for example, shows a painful adjustment for workers in import-competing industries after trade liberalization in the 1990s (Dix-Carneiro and Kovak 2017). There are other studies, though, showing that trade shocks have improved local labor market outcomes in South Asia and Vietnam. These findings from trade-related shocks on workers in select industries or regions have led to a growing body of research and analysis. This work is vital given that adverse distributional impacts associated with globalization increasingly serve as an argument for protectionism and greater economic nationalism, especially given the perceived lack of adequate policies to mitigate these losses. Currently, the global spread of COVID-19 is raising questions about many countries’ dependence on foreign suppliers and the fragility of global value chains. Studies additionally show that inequality will worsen in nearly all economies in 2020–21 because the pandemic’s economic impacts are disproportionately felt by people whose incomes are lowest (World Bank 2020a). A good understanding of the distributional consequences of trade policies is key to achieving the World Bank’s twin goals of reducing global extreme poverty and promoting shared prosperity by 2030. A recent study (World Bank 2018) finds that the only scenario whereby the Bank’s target can be met and the global extreme poverty rate can be pushed below 3 percent by 2030 is one in which real growth rates are higher than in the past and income growth of the bottom 40 percent is 2 percentage points higher than the income growth of the top 60 percent. Trade can support faster economic growth, but understanding its impact on within-country inequalities over time will contribute to developing policies that address those inequalities and eradicate extreme poverty.
Value Added and Road Map In recent years, the global community’s understanding of the complex nature of the distributional effects of trade reforms and their policy implications, as well as the policies designed to mitigate adjustment costs and maximize benefits from integration, has improved substantially. There are still big knowledge gaps—notably the impact of trade changes on within-country distribution, especially across regions, industries, and demographic groups over time—that make it difficult for countries to make further progress. This report aims to fill some of those gaps and provide a foundation for better policy advice. It synthesizes two years of research, the development of new data sets and tools, and numerous other initiatives by World Bank teams, in consultation with outside experts. It also builds on and further develops a number of recent reports by international institutions that have addressed the links between trade reforms and welfare outcomes.
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The Distributional Impacts of Trade
