For a long time, Brazil has been accumulating a significant delay in the international integration of its economy, to the point of, recently, giving rise to proposals of a new round of unrestricted and unilateral trade opening. The timing is, therefore, conducive to a discussion of the effects of abrupt trade liberalization, as did Rafael Dix-Carneiro (Duke University in the US) and Brian K. Kovak (Carnegie Mellon University, USA) in their article "Margins of labor market adjustment to trade", whose conclusions are analyzed in this Letter IEDI.

The IEDI's view on the subject is very clear: the Institute has long advocated for a greater integration of Brazil with the world economy, which must follow a strategic stance so as to make the most its positive effects. As recommended by the IEDI in the document "Industry and the Brazil of the Future", our strategy should focus on multilateral or bilateral trade agreements with as many countries as possible, together with the reduction of systemic costs that are so detrimental to the competitiveness of domestic production. It is important that time is given for economic agents to adapt to the new reality.

Dix-Carneiro and Kovak's study finds empirical evidence that Brazilian trade liberalization in the 1990s, through a sharp reduction in import tariffs, had detrimental impacts on employment until, at least, 2010.

The authors examined changes in wages and incomes, inter-regional migration, changes in employment in tradable (goods and services traded abroad) and nontradable sectors, as well as changes in formal employment, in the short and the long run.

As the regions present different sectoral compositions, they were distinctly affected. Thus, the authors were able to assess and compare labor market conditions across regions according to the degree of tariff reduction (high or low), showing that the initial level of employment is very important to the determination of the subsequent results of trade liberalization.

In summary, Dix-Carneiro and Kovak identified the following effects on employment:

     • In the formal sector, workers have been employed for less and less time and their gains have continuously dropped compared to those in regions less exposed to trade liberalization;

     • There was no migration from regions more affected by trade liberalization to those less affected in response to deteriorating local labor market conditions, so that the adjustment took place mainly within their own region;

     • Greater probability of jobs beign transferred from tradable to nontradable sectors, even if such transfers did not compensate for the entire loss of jobs in tradable sectors;

     • Formal jobs and income losses happened in both tradable —which were directly affected by trade policy— as well as nontradable sectors, indicating a strong integration between the two at the regional level.

According to the authors, their conclusions can help, in different ways, policymakers in their decisions about the design of economic programs. Once the negative dynamics of the labor market in the face of a more pronounced process of trade liberalization are understood, there may be need for compensatory measures.

In the Brazilian case, because the labor markets of tradable and nontradable sectors are strongly integrated, the authors point out that any policies aimed at minimizing the negative effects of greater trade liberalization on employment can not be restricted to segments directly affected by the higher external competition (tradables), nor can neglect the large contingents of workers in other sectors indirectly impacted (nontradable)..

The full text is available in Portuguese.