Trade Adjustment Costs and Assistance: the Labour Market Dynamics

To benefit from trade and trade liberalization, economies have to reallocate factors of production within and between sectors. This structural change is the source of gains from trade but brings with it costs of adjustment. Evidence has, for instance, confirmed that some groups of workers tend to face temporary unemployment and lower income when their jobs are lost as a result of international competition Adjustment to trade reform or to changes in trade flows have always tended to be rather high on policy-makers’ agendas. In the United States, for instance, the Trade Adjustment Assistant programme (US-TAA) was established as early as 1974. The programme aims at assisting workers and enterprises that are negatively affected by trade reforms or changes in trade flows. The European Union (EU) introduced a similar programme, the European Globalization Adjustment Fund, in 2006. Also at the multilateral level, trade negotiators have felt compelled to deal with the issue of adjustment. The World Trade Organization’s (WTO’s) Agreement on Safeguards and Countervailing Measures, for instance, contains explicit references to the adjustment process following changes in trade flows. The adjustment process following trade reform has also been the subject of studies published by relevant international institutions1 and is being discussed in the context of Aid for Trade.2 Compared with the attention that adjustment challenges have received in the political debate, the academic literature on the subject is rather meagre, notwithstanding a certain revival of interest in the subject in recent years. This lack of academic interest in the topic may be due to the fact that in early empirical work, adjustment costs were estimated to be negligible when compared to the long-run gains for the