especially problematic because workers face not only adjustment costs from reduced trade costs, but under this scheme also a higher tax burden.

A more viable option may therefore be to prioritize trade policy reform of non-tariff measures. Although discussions of trade policy reforms often focus on tariffs, there is a wide range of non-tariff measures that also increase trade costs. For instance, rationalizing import and export licensing procedures or simplifying rules of origin in trade agreements boosts trade integration by lowering trade costs. An attractive feature of these kinds of reforms is that they boost imports without lowering tariff rates, so their net effect is to increase, not decrease, tariff revenue. If accompanied by a tariff reform, net revenue could be maintained. The lesson here is that smart reforms of non-tariff measures can help support fiscal space in countries where trade taxes account for a significant proportion of government revenue. Given that the tariff equivalents of non-tariff measures tend to be much higher than tariff rates of protection (Arvis et al., 2016), there is also an efficiency argument for focusing on non-tariff measures when prioritizing trade reforms.

A relatively underexplored avenue of reform relates to tariff changes that are efficiency-enhancing but which minimize the potential for negative revenue effects. While the structure of such a reform may be complex, it would consist of some mix of maintaining rates in some areas, while reducing them in others, typically focusing on the highest rates. Detailed modeling would be required to ascertain the balance between enhanced import response (which tends to boost revenue) and decreased tariff rates (which tend to reduce revenue), but there is the possibility of designing a reform that promotes efficient reallocation across sectors, while not impinging unduly on the government’s ability to design and implement complementary policies that involve significant real resource costs.

# **4.2 Complementary Policies to Facilitate Sector Reallocation**

Trade policy reform is a necessary but not sufficient condition for successful trade integration, let alone for managing its labor market adjustment costs. Complementary policies are needed, which at the sector level could include export promotion, and investment, competition, and innovation policy, to name a few (Bartók and Miroudot 2008). While such complementary policies can lower trade costs and uncertainty, one key contribution is that they help facilitate sectoral reallocation of resources to the growing export sectors. But sectoral policy measures can also help mitigate the labor market disruptions accompanying trade policy reforms, by helping export sectors expand– either directly through export promotion (Cadot et al., 2015) or indirectly by promoting certain types of foreign investment (Harding and Javorcik, 2011). Different complementary policies at the sector level are discussed in more detail below.

FDI has been identified as a significant driver of GVC participation across countries (Kowalski et al. 2015, Buelens and Tirpak 2017, Fernandes et al. 2022). FDI is especially relevant when countries are scarcely endowed with capital, technology, and knowledge (World Bank 2020a). Another study specifically measures the role of FDI restrictiveness and finds that it is associated with reduced GVC participation in low-tech manufacturing (Cheng et al. (2015). So taking steps to encourage foreign direct investment in export industries, including with a focus on particular sectors, is a way of helping expand output in those industries, which in turn increases demand for labor. That increased demand can take up part or all of the slack in the labor market created by contraction of import-competing sectors.

Investment promotion can help attract certain types of foreign investment and indirectly stimulate export growth. Harding and Javorcik (2012) find that sectors that have been prioritized by investment promotion agencies in low- and middle-income countries export relatively higher-quality products.

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