and transport services creates demand in these labor-intensive and relatively unskilled sectors. In addition to non-traded services, traded services also have the potential to foster job creation and welfare improvements that are consistent with achieving the Bank’s twin goals. Tourism is one of the largest export sectors in many developing countries and tends to employ unskilled labor (Ashley and Mitchell 2010). Unlike merchandise trade, opening services trade does not tend to displace domestic production in developing countries. Increased services imports can in fact improve the efficiency of domestic service provision in areas important to the poor, including financial, health and retail services.<sup>11</sup> On the other hand, under-regulated opening to foreign service providers risks undermining access to services by disadvantaged groups if it leads to excessive market concentration whereby foreign providers corner the most lucrative part of the market but do not meet the needs of poorer households (Calì et al. 2008).There are also general equilibrium effects to consider that may counter the gains to employment and wages, thus creating tradeoffs. If, for example, expanded tourism trade increases economy-wide prices of food/restaurants, transportation or construction, it may be welfare-reducing for some sectors or populations, and thereby affect the net result.

Non-agricultural trade also plays an indirect role in boosting economic growth and poverty reduction, namely through productivity and efficiency gains. Brambilla, Lederman and Porto (2012) find that firms with a larger share of exports in total sales – in particular exports to highincome countries – pay higher wages, reflecting a more productive and more skilled workforce. A more open trade regime can strengthen domestic trade competitiveness by enhancing firms’ access to needed intermediate inputs. Expanded trading opportunities not only ensure access to cheaper inputs, but also to a greater variety of inputs, some of higher quality and/or that embody new technology, thus allowing firms to increase productivity and expand output.<sup>12</sup> This is also the case for services imports such as transport, finance and communications, which are key inputs for merchandise and other services production and exports.<sup>13</sup> Minimizing trade-induced welfare losses in non-agricultural sectors requires policy makers to strike a balance between protecting domestic producers and workers from the adverse impact of import competition, and ensuring access to inputs and goods to the domestic economy. The indefinite protection of sectors from international competition is not conducive to achieving the twin goals in a sustainable way. On the other hand, sudden trade opening carries risks that can undermine the benefits of liberalization by unduly burdening lower income households. Effective policy requires an awareness of the potential trade-offs and measures to mitigate short-term adjustment costs for vulnerable households.

# **4.  Labor adjustment to trade shocks**

Retaining our focus on the short term, trade opening can potentially help or harm poor households in the aftermath of a trade-related shock, and in this section we explore the reaction of workers to changing price signals, the ways in which labor supply adjusts to trade-induced changes in labor

> 11 These are additional examples of consumption channels for improving the welfare of poor households.

> 12 See Amiti and Konings (2007) for evidence on Indonesia, and Goldberg et al. (2010) for evidence on India.

> 13 Arnold et al. (2011) and Duggan et al. (2013) provide evidence that services trade liberalization is associated with higher productivity of the manufacturing sector in Czech Republic and Indonesia, respectively.

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