Adjusting to Trade Liberalization — The Role of Policy, Institutions and WTO Disciplines seeks to identify tools at the disposal of governments to smooth adjustment, to minimize an economy's adjustment costs and to alleviate the burden of those who suffer most.

Main Findings
This study examines in detail the process immediately following a change in trade policy and analyzes what this process entails for the economy as a whole and for individual workers and companies. The study aims to assist policy makers in pinpointing those aspects of an economy that hamper adjustment. It seeks to identify tools at the disposal of governments to smooth adjustment, to minimize an economy’s adjustment costs and to alleviate the burden of those who suffer most.

Some of the salient conclusions from the study are summarized below:

• Trade liberalization is an agent of economic change, but evidence shows that it does not lead to drastic changes in a country’s overall production structure.
• Adjustment costs are typically smaller, sometimes much smaller, than the gains from trade.
• Governments can identify individuals and groups that may suffer from the adjustment process and they can also develop policies to alleviate the burden falling on those adversely affected.
• Governments can adopt policies that influence the size of adjustment costs faced by the economy.
• Adjustment costs can be reduced if trade policy reforms are underpinned by international commitments.
• The pace of trade reforms can have a beneficial impact on adjustment costs.
• The implementation of trade reforms at a gradual pace may lessen political opposition to change, but the risk of undermining reforms by adopting them too slowly must also be borne in mind.
• In many cases effective adjustment to trade liberalization will require the expansion of a country’s export sector and this may be an argument for pro-export policies.
• WTO agreements seek to provide space for governments to tackle adjustment problems.

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WTO Publications
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E-mail: publications@wto.org 
ISBN 92-870-1232-6

Table of Contents
I. Introduction and Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 5
II. Trade and the pace and pattern of economic change . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 9
III. On the benefits and costs of trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
A. Temporary adjustment costs and long-term benefits . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 15
B. Evidence on adjustment costs: the net gains from trade liberalization when adjustment costs are taken
into account . . . . . . . . . . . . . . . .. . . . 16
C. Evidence on adjustment costs: the effect of trade liberalization on (un)employment. . . . . . . . . . . . . . 17
D. Results and open questions: why are adjustment costs a matter of concern for policy makers? . . .  . . 18
IV. Why it is important to distinguish between adjustment effects and other income effects of trade reform 21
A. Workers and adjustment . . . . . . . . . . . . . . . . . . . . . . . 22
1. How are workers affected by adjustment costs . . . . . . . . .. . . . . . . . . . . . . . . 22
2. Empirical evidence on the losses suffered by displaced workers . . . . . .. . . . . . . . . . . 23
B. Firms and adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . 26
C. Adjustment costs and resistance against trade liberalization. . . . . . . . . . .  . . . . . . . 29
V. Governments can facilitate the adjustment process. . . . . . . . . . . .. . . . . . . . . . . 33
A. Domestic institutions and policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1. Credit markets and social safety nets . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 33
2. Labor markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . 34
3. Education and training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4. Infrastructure and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5. Information and expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . 37
6. Domestic macroeconomic policy . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 37
B. Trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1. Political and economic arguments in favor of gradual trade liberalization. . . . . . . . . . . . . 37
2. Why implementation periods may help firms to adjust but cannot replace social safety nets . .. . 39
3. Why the credibility of trade policy matters for adjustment . . . . . . . . . . . . . . .. . . 39
4. Export promotion and the expansion of exporting sectors . . . . . . . . . . . . . . . . . . . 40
VI. WTO provisions give governments flexibility in managing trade-related adjustment . . . . . . . . . 43
A. Transition periods, implementation periods, deadlines . . . . . . . . . . . . . . . . . . . . . 44
1. Transition periods available to all Members . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2. Additional flexibility for developing and least-developed countries . . . . . . .. . . . . . . 45
B. Safeguard measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1. Article XIX and the Agreement on Safeguards . . . . . . . . . . . . . . . . . . . . .. . . . . . . 48
2. Other specific safeguards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3. Differences between safeguards and other contingent protection instruments. . .  . . 55
4. Balance-of-payment provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
C. WTO provisions on subsidies . . . . . . . . . . . . . . . . . . . . .. . 58
VII. Bibliography. . . . . . . . . . . . . . .. . . . . . . . . . . . 61
VIII. Technical Annex . . . . . . . . . . . . . . . . . . 65
A. Structural change index . . . . . . . . . . . . . . . . . . 65
B. The distributional effects of adjustment costs. . . .  . . . . . . 65
C. When adjustment takes time . . . . . . . . . . . . . 65
IX. Annex Section II. . . . . . . . . .. . . . . . . 67

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