Discussion Paper

No. 2018-49 | June 13, 2018
(Submitted as Global Solutions Paper)

Abstract

The evidence demonstrating that nations gain from trade is overwhelming. However, trade liberalization can cause disruption to firms and workers, and its gains and losses are spread unevenly. While many gain from trade, import surges have sometimes undermined the economic viability of whole communities. Existing mechanisms specifically designed to mitigate trade adjustment costs are often inadequate. They can be a source of inefficiency and inequity since trade shocks are only a part of the economic uncertainty affecting workers. Gradualism in trade liberalization combined with preemptive measures to strengthen competitiveness, can help mitigate adjustment costs. Displaced workers are best helped using generally applied safety nets, not those specific to trade. But these are not enough. Trade adjustment requires mobility of factors. International coordination is required to support an open and predictable trading system under the WTO, as the greatest future source of trade shocks could be protectionism, not trade liberalization.

JEL Classification:

F16, F61

Assessment

  • Downloads: 434

Links

Cite As

Sait Akman, Clara Brandi, Uri Dadush, Peter Draper, Andreas Freytag, Miriam Kautz, Peter Rashish, Johannes Schwarzer, and Rob Vos (2018). Mitigating the adjustment costs of international trade. Economics Discussion Papers, No 2018-49, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-49


Comments and Questions


Alena Kimakova, York University, Toronto, Cananda - Report
July 11, 2018 - 08:43

I very much welcome the submission of this paper because it is timely and it summarizes the crux of of the issues that lead to conflict related to international trade both within countries and internationally. It is also written in a manner that makes the analysis of these issues accessible ...[more]

... to a wide audience, which is important for such a politically charged topic that can have (and has had) a significant impact on elections and policies as a result. I also welcome the fact that the authors situate the discussion in a broader context to include other factors - e.g. automation - that have similar results for workers and income inequality as international trade does.

A few other points of feedback include:

- I would encourage the authors to refrain from the use of the term "unfair trade practices" because it can mean many different things in different contexts to different people - especially if we consider a wide audience for the paper and/or in political debates, which the topic of international trade policy cannot avoid. I would suggest to replace this term with more tangible descriptors and/or examples of practices that infringe on trade and competition, or specific trade agreements/rules.
- In terms of the proposed solutions for the problems outlined - e.g. social safety nets, redistribution, policies and programs aimed enhancing factor mobility - all these will have a fiscal impact, but this is not analyzed in the paper and that is arguably the paper's biggest shortcoming. That said, I can accept the authors' assertion that a fiscal impact analysis is beyond the scope of this paper, although at least some examples of the fiscal implications of such measures would be helpful. It would be also helpful to address at least briefly the issue of international capital mobility and its implications in terms of limiting taxable capacity for corporate income taxation, and thus limiting the scope for redistribution when labour is relatively more immobile and thus tends to bear the burden of taxation more heavily.
- Finally, I very much welcome the inclusion of policy recommendations for governments and international organizations to highlight more the benefits from international trade that often tend to be overlooked or undervalued by the general public/voters as well as the costs of emerging protectionism. Nevertheless, this also means that the execution of such research and resulting public education/communication programs will be a crucial component of the success or failure of any policies aimed at promoting trade liberalization. It also implies that more attention and research should be devoted to including an interdisciplinary prospective and research/resources from public administration, program evaluation, communication and potentially other fields to come up with a set of best practices to follow since the average citizen can have a difficult time differentiating between actual evidence and special-interest agendas and their communications.


Nicolas Schmitt - comment
July 13, 2018 - 16:48

see attached file


Anonymous - Invited Reader Comment
July 16, 2018 - 10:53

see attached file


Andrea Maneschi, Emeritus, Vanderbilt University - Invited Reader Comment
July 31, 2018 - 12:31

This Discussion Paper by nine authors argues for international coordination in promoting adjustment to trade shocks. The authors conclude that “displaced workers are best helped using generally applied safety nets, not those specific to trade.” They note that technological changes can cause more widespread harm to workers than changes ...[more]

... due solely to trade. For these reasons, the authors may wish to broaden the title of their paper to “Mitigating the adjustment costs of technology and international trade”, since the former costs often outweigh the latter.

The paper is clearly and logically structured, is well supported by the construction of Figures 1 and 2, and leads to reasonable policy conclusions. The authors usefully (and presciently, in light of the “trade war” that currently seems to be in the process of unfolding between the United States and some of its main trading partners) warn us that “the greatest future source of trade shocks could be protectionism, not trade liberalization”. They argue that “international coordination is required to support an open and predictable system under the WTO”. Since by “international coordination” they mean a willingness to abide by the rules that all member countries of the WTO are pledged to follow, the question arises whether in fact this should require additional “coordination” with other countries.

The authors point out that the trade liberalization achieved after World War Two resulted in such low tariff rates that the overall gains from any additional liberalization that is likely to occur are very small as compared to the distributional and employment effects of gains and losses to which the participating countries are exposed. This raises an issue that the authors may wish to address: whether the WTO’s mandates should be expanded to include a mechanism whereby member countries are automatically compensated for the adjustment costs that globalization forces upon them, in a world that does not obey the assumption of frictionless adjustment that underlies standard neoclassical trade models. This is all the more important given the authors’ correct observations that “the evidence on the existence of compensation of losers from trade is quite unequivocal and consistent, there is often little and sometimes none”, and that “from considering these costs minor, economists have come to recognize that adjustment costs can be large and persistent”.

After these fairly minor changes that the authors can readily make, I believe that their paper deserves to be posted as a worthwhile contribution to the framing of trade policy in our volatile world economy.