Trade Restructuring: Assessing Labor Market and Welfare Effects

Kaleb Abreha and Gladys Lopez-Acevedo

No 10955, Policy Research Working Paper Series from The World Bank

Abstract: This paper assesses patterns and drivers of current trade restructuring and its welfare implications. The main trade restructuring drivers include lower cost advanced technologies, rising offshore labor costs, and recent shocks like COVID-19, trade disputes, and geopolitical tensions. Data on bilateral trade flows show that the United States and the European Union have reoriented their trade relationships. Between 2017 and 2023, for example, U.S. imports from countries like Mexico and Viet Nam grew significantly, whereas imports from China and Japan declined significantly. Market reallocation stems from tariffs, trade restrictions, and large-scale industrial policies. Countries with greater competitiveness, high logistics capabilities, and technological readiness are emerging as new production hubs. Additionally, restructuring is having significant welfare effects. Automation has increased reshoring and increased wage inequality between high- and low-skilled workers in offshoring countries, reduced export demand, and led to job and income losses in offshore countries. Furthermore, protectionist measures have, predictably, decreased welfare. U.S.-China trade tensions, for example, raised U.S. consumer costs, reduced product variety, generated small tariff revenue, and forced exporters to absorb most of the retaliatory tariffs. Looking ahead, more evidence is needed on the long-run effects from restructuring and its effects on welfare. Meanwhile, policy dialogue should focus on preventing trade fragmentation and mitigating adverse welfare effects.

Date: 2024-10-23
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