Why Distributional Issues Matter

Maintaining trade flows during the pandemic will be crucial to providing access to essential food and medical supplies, as well as to limiting the negative impacts on jobs and poverty and sustaining global economic activity. Trade will also play a critical role in producing and distributing the vaccine at the global level and in facilitating an economic recovery by helping to strengthen the resilience of economies to future shocks (OECD 2020). Government efforts to encourage reshoring through subsidies for domestic sourcing could damage productivity and incomes, especially in developing countries where growth and poverty reduction were stimulated by their participation in global value chains (World Bank 2020b).

To ensure sustained support for trade, it is vital to clearly communicate how trade affects welfare across all segments of the population and its potential role in reducing global disparities. This report seeks to advance this effort by providing a deeper understanding of the within-country distributional impacts of trade—especially within regions, industries, and demographic groups—through the labor market and consumption channels. With that understanding, policy makers can craft more effective measures to maximize gains from trade, ensure that the gains are more broadly distributed, and better address adjustment costs.

Why Distributional Issues Matter

Changes in trade policy have distributional impacts that create winners and losers. Losses are often highly visible and concentrated, whereas gains are distributed more widely, undermining popular support in trade liberalization despite the aggregate gains (Artuç 2021; Artuç, Porto, and Rijkers 2019; Grossman and Helpman 1994). Two dynamics have come together to make this issue particularly salient now.

First, there have been substantial improvements in empirical methods, data collection, and computational capacity that have enabled the analysis of highly localized impacts over several decades. Recent studies show that the costs of moving across regions or industries can be far higher than previously assumed. In addition, the effects of trade on local labor markets can be large and long-lasting. Several high-profile books that draw on these studies (Banerjee and Duflo 2019; Rodrik 2017) also argue that insufficient attention has been paid to distributional impacts.

Second, there has been a growing awareness among policy makers in developing countries of differential impacts across industries, subnational regions, and population groups. So far, most of the work on the impact of trade on local labor markets has focused on trade shocks in developed countries, and it finds that the impacts of import competition are often localized and large.