The Effects of Trade Policy Reform: What Do We Really Know?

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The magnitude of existing research on the effects of trade reform is impressive. Yet economists have not reached a clear consensus on a number of important questions such as the labor market impact of trade reform, the linkages between trade and foreign direct investment, and the relationship between trade and growth. In this paper we attempt to clarify what we know about the relationship between trade reform, factor markets, and growth. Although many studies have shown a positive relationship between various measures of openness and growth, many nagging problems remain. Trade policy is almost never measured using the most obvious indicators -- such as tariffs. In addition, many studies are plagued by serious econometric problems. The evidence on labor markets and trade reform is less extensive. Based on the studies to date, it appears that the unemployment and wage effects of trade reforms have generally been small. In the paper, we discuss the possibility that small wage and employment responses are due to labor market regulations. The paper concludes with an analysis of the linkages between trade policies and foreign investment flows. Our evidence suggests that trade reform has been accompanied by significant increases in investment inflows.

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