Introduction

Introduction

In recent decades, there have been substantial advances in our understanding of the theoretical and empirical relationship between aggregate and distributional impacts of trade reforms on welfare (see chapter 2). These advances have shown how impacts can vary spatially (at the local or national level) and temporally (in the short and long term). Although the empirical literature analyzing the distributional impacts of trade has expanded, evidence of subnational variations in impacts remains concentrated in a few countries. Even so, these studies offer some key empirical lessons.

The subnational effects of trade shocks can be large, can disproportionately affect some localities more than others depending on their exposure to such shocks, and may be negative or positive depending on the type of shock. In Brazil and India, import competition has triggered a large decline in wages and employment, and an increase in informality in import-competing regions relative to others. In China, India, and Vietnam, higher exports have reduced poverty, improved wages, and spurred a reallocation of labor from informal to formal jobs in localities more exposed to higher exports.

Negative or positive subnational impacts on employment and wages persist over time in localities with greater exposure. Recent work finds wage and employment declines in regions more exposed to import competition to be more pronounced 20 years after the trade reforms in Brazil than they had been after 10 years (Dix-Carneiro and Kovak 2017). Similarly, districts in India that experienced greater exposure to a rise in exports tended to experience sustained increases in wages and reductions in informality.

Not surprisingly, researchers find that these costs are in part driven by multiple barriers to mobility. Dix-Carneiro (2014) shows that, in Brazil, a large part of the switching cost is caused by the low transferability of human capital, a finding that others have substantiated. In some other countries, adjustment costs are driven by actual moving costs needed to find or start a new job. In Chile, China, and Mexico, labor market regulations and policies related to housing drive these costs higher and depress gains from trade.

Informal employment can be an important channel of adjustment for workers in emerging economies, regardless of the type of trade shock they are exposed to. In Brazil, there has been a rise in informality in areas more exposed to tariff reductions in the medium term. In contrast, research on India and Vietnam highlights a pattern of workers shifting from informal to formal employment in areas more exposed to greater export orientation.

Trade liberalization can typically favor the poor through lower prices, unlike income losses, which are more concentrated. While understudied, existing evidence

consistently suggests pro-poor consumption gains from trade reforms across countries. This is not surprising because traded goods form a significant share of a lowincome household budget compared to that of nontraded goods or services, especially in emerging economies (Artuç et al. 2020).

Benefits from lower prices may not fully pass through to consumers depending on factors like geographic characteristics of localities, efficiency of product markets, and markups (Ural Marchand 2012). Evidence from Ethiopia and Nigeria shows that intermediaries capture the majority of the surplus (Atkin and Donaldson 2015).

If we are to ensure that gains from trade are more broadly distributed going forward, however, we need to better understand the connections between changes in trade and (a) local labor market impacts, (b) consumption channel impacts, and (c) ultimate distributional impacts. Specifically, many important questions are still left unanswered.

■ To what extent do the long-lasting income impacts of trade reforms that are observed in Brazil also apply to other emerging economies and institutional settings, and are there specific components of adjustment costs that could lead to persistent income impacts?

■ Beyond wages and employment, are there any other important channels of adjustment in labor markets? Is informal employment a key adjustment mechanism in emerging economies?

■ What are the local labor market effects of expanding exports to rich countries on workers from emerging economies? Which groups gain or lose more?

■ What are the consumption and income impacts in low-income countries of higher exports to rich countries? And how do these effects vary across the income distribution?

To shed more light on these questions, this report synthesizes five case studies of low- and middle-income countries—Mexico, Bangladesh, South Africa, Brazil, and Sri Lanka—to test emerging empirical lessons and fill in empirical gaps. These studies include countries that have (a) undergone significant trade reforms in the past two decades, (b) evidence of geographical concentration of production and sluggish mobility across regions, (c) broad country coverage in terms of both regions and level of development, and (d) available data for an econometric analysis of local labor market impacts.

The studies on Bangladesh and South Africa test whether the subnational effects of trade reforms persist over time (as has been found for Brazil) and whether some communities are more affected than others. The study on Bangladesh also examines whether the informal economy acted an a vital adjustment channel for workers in response to trade shocks. The studies on Bangladesh, Brazil, and Mexico expand the