Brazil Study Uncovers Disturbing Side-Effects of Trade Liberalization
In the study, “Trade Liberalization and Regional Dynamics,” Brian Kovak of Carnegie Mellon University’s Heinz College and Rafael Dix-Carneiro of Duke University examine how Brazil’s local labor markets responded to tariff reductions implemented in the early 1990s.
The authors discovered that wages and employment growth in regions with industries facing increased import competition fell behind other areas and did not catch up for 15 years – significantly longer than standard trade models and previous research predicted.
The authors found that from 2000 to 2010, workers in regions that were negatively affected by freer trade saw the gap in their earnings grow by 300 percent when compared to workers in other regions. The lack of labor market mobility and slow movement of capital between geographic regions were the fundamental impediments to adjustment.
“Regions that initially specialized in industries facing larger tariff cuts experienced prolonged declines in formal sector employment and earnings relative to other regions,” the report states. “The impact of tariff changes on regional earnings 20 years after liberalization was three times the size of the ffect 10 years after liberalization.”
The study, which will be published next month in American Economic Review, sheds light on the effects of increased international trade in other large and diverse economies, including the United States. The authors encourage policymakers to consider this research when debating where to target interventions to assist workers that are displaced by increased import competition.