Mitigating the adjustment costs of international trade

Abstract

This brief examines possible policy responses to the adjustment costs related to international trade. It argues that, contrary to the conclusions drawn from frictionless neoclassical models, the costs of adjusting to trade are large and persistent and may be a cause of the increase in the political resistance to trade. The existing mechanisms specifically designed to mitigate the adjustment costs related to trade are inadequate, and they are often a source of inefficiency and inequity since trade shocks are only a part of the economic uncertainty affecting workers. The brief also argues that the most promising policies are those that extend the social safety net where necessary, protecting workers from all shocks, not just trade shocks, and those that facilitate the mobility of factors of production across sectors and regions. Many of the latter policies should be pursued anyway to improve the nation's competitiveness. As has become increasingly evident over the past year, protectionism and unfair trade practices can also be a source of trade shocks affecting exporters in partner countries, underscoring the importance of maintaining an open, rules-based and predictable trading system. ; IFPRI5; CRP2; 3 Building Inclusive and Efficient Markets, Trade Systems, and Food Industry ; MTID; PIM ; Non-PR ; CGIAR Research Program on Policies, Institutions, and Markets (PIM)