Most governments impose tariffs and other restrictions on international trade as both a source of public revenue, as well as to protect domestic producers from being undercut by foreign competitors. However, according to trade theory these restrictions create distortions in the economy, by protecting inefficient producers, and leading to net welfare losses in particular for consumers. In recent decades there have been substantial agreements to reform tariffs and other international trade restrictions in recent decades. However, at least in the short term, there are winners and losers as a result of trade reform, chief among which are losses in total employment and government fiscal revenues. Concerns about potentially high adjustment costs impede further progress in reforming trade policies but determining the likely extent of costs is an empirical question. Helping policy makers manage costs is a vital aspect of reform.
To perform a systematic review of the existing evidence on the impact of trade agreements on employment and government revenue in developing countries. This is a review of quantitative studies, and the question is split in two sub-questions: the impact on employment and the impact on government revenue, which we answer separately. The review aims to provide quantitative estimates of the impact of tariffs reductions on employment and government revenue. A final objective of this review is to compare the results from the synthesis of computable general equilibrium (CGE) simulation results with the authors' preferred econometric evidence based on observational data.
The authors performed a comprehensive search for published and unpublished literature, including relevant databases and search engines. They restrict the review to quantitative studies which are capable of attributing trade reforms to changes in employment and revenue outcomes, controlling for alternate explanations for these changes. Computable general equilibrium (CGE) simulation studies and ex post regression studies are included in the analysis, and are synthesized separately. Regression studies are assessed as being of higher quality where they correct for potential endogeneity (reverse causality) between the trade policy variable and the outcome, that use tariffs as the measure of trade policy rather than output indicators such as openness (e.g. the volume of international trade flows or its share in national income), and which explicitly underwent a process of peer review (including journal articles, theses and working papers). CGE studies that were peer reviewed and which used systematic sensitivity analysis were considered of higher quality. Where possible and appropriate, the authors synthesise results using meta-analysis and meta-regression.
109 studies are included in the review, representing 42 studies examining revenue outcomes and 75 studies examining employment outcomes. The studies comprise 67 studies based on observational data and 42 studies based on ex ante CGE simulation models.
The main findings for employment are as follows:
- Higher quality observational studies tend to find that tariff reductions lead to reductions in employment. However, studies which use lower quality measures of trade reform, such as trade flows, tend to find that openness is correlated with higher employment. Trade flows depend on a wide variety of factors, and so can be a poor proxy for tariff reductions. In addition, most studies find significant job reallocation, especially in increased employment in export sectors following liberalization.
- CGE simulation models that allow for trade reform impacts on the level of aggregate employment tend to predict moderately positive effects on job creation. On average, a 1 percent increase in the volume of trade due to trade reform raises aggregate employment in the reforming country by 0.34 percent (31 studies).
- Overall employment is likely to decrease slightly in the short run following liberalisation, but over the longer term the evidence generally supports job creation in the export sector but with more ambiguous effects in import-competing sectors.
The main findings for revenues are as follows:
- High quality observational studies do not find a strong relationship between trade reform and tax revenue. Studies which use lower quality measures of trade reform, such as trade flows, tend to find that openness is correlated with higher tax revenues.
- CGE simulation studies generally show negative effects of trade reforms on tax revenues or the need for increases in other tax rates in order to compensate for lost tariff revenue (24 of 28 included studies).
- The likely outcome following liberalisation or implementation of a trade agreement is one of lower trade tax revenue, all else equal.
The systematic review is based on a comprehensive search, appropriate use of evidence, critical appraisal and analysis. It has some limitations, in that it is not possible to assess whether two researchers extracted and prepared data for meta-regression.