Factor adjustment and imports from China and India: evidence from Uruguayan manufacturing

This note studies the impact on the adjustment process of Uruguayan manufacturing firms’ capital, and unskilled and skilled labor demands associated with increasing import penetration from China and India. The adjustment process is defined as the percentage of the gap between desired (optimal) and actual factor employment levels closed by the firm. Desired factor levels are obtained from a counterfactual profit maximization exercise in the absence of adjustment costs. Results suggest that adjustment costs are quite large in the Uruguayan manufacturing sector as firms tend to adjust only a small share of the gap between desired and actual levels. The growing import penetration from China and India is associated with higher adjustment costs on the elimination (firing of workers) of unskilled employment, but lower adjustment costs on the creation of unskilled employment. The adjustment process of capital and skilled workers does not seem to be affected by the growing presence of Chinese imports, whereas adjustment costs seem to be higher for skilled labor and capital in those sectors exposed to higher import competition from India. The opportunity costs in terms of economic efficiency and employment can be quite large.