TRADE REFORM: Conclusion

Proponents of a general equilibrium framework could simply argue that we cannot capture the impact in this partial equilibrium, plant-level analysis. However, the results do point to the importance of foreign investment, export orientation, and technological change (as captured by royalty payments) in driving wage inequality. Since there were significant changes in both foreign investment and export orientation during this period, with rapid increases in both, these results suggest that openness certainly does matter.

Further analysis, on a sample with greater variation over time in many of the dependent variables, is needed to analyze the importance of these factors. Nevertheless, there are many still unexplained sources of increasing wage inequality in Mexico, as is clear from the significance of the time dummies in Table 5.

Concluding Comments

We began this paper with the claim that most policy makers consider our knowledge of trade policy to be complete. Our goal was to highlight some continuing puzzles in our understanding of the effects of trade reform. We began with an examination of the evidence on trade reform and long run growth. Our analysis suggests that many approaches to measuring “openness” are significantly flawed: as an illustration, we showed that recent work by Sachs and Warner (1995) is not robust.

We then turned to a discussion of the impact of trade reforms at the micro level. The puzzle that we focused on in this section was the small impact on employment of large changes in tariffs and quotas for at least two countries: Mexico and Morocco. We argued that focusing on labor market effects ignores other ways in which firms adjust to falling protection–such as reducing excess profits and raising productivity.
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Finally, we concluded by analyzing the impact of trade reform on relative wages in Mexico. During the 1980s in Mexico the wages of skilled workers rose relative to the those of unskilled workers. We assess the extent to which the increase in wage inequality was associated with the 1985 trade reform. To be consistent with the Stolper Samuelson (SS) theorem, the increased wage inequality observed in Mexico would have to reflect an increase in the relative price of skill-intensive goods.

If tariffs fell less in skill-intensive sectors, this would be consistent with the observed increase in inequality. We discuss evidence suggesting that protection in Mexico was skewed towards low-skilled sectors prior to reform, and that tariffs fell most in sectors which had a higher share of unskilled workers in 1984. Although these observed changes in trade policy are consistent with the Stolper Samuelson theorem, we also present evidence from plant-level regressions suggesting that both foreign direct investment, export orientation, and technological change also played an important role in the observed increase in wage inequality.

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