country sectoral level (Winkler et al., 2023) and at the municipality level for Mexico (Vazquez and Winkler, 2023).

However, countries benefit differently from trade liberalization. Firm-level evidence for China and Bangladesh, for instance, suggests that liberal trade policies have been an important factor for upgrading along GVCs (Kee 2015, Kee and Tang 2016). The expected trade gains are even larger for countries with high trade protection, especially in South Asia, but also in Sub-Saharan Africa (SSA) and the Middle East. These also tend to be the regions having a lower reliance of imported inputs for export production (World Bank 2020a). Evidence for the food sector confirms that while a reduction in import tariffs increases GVC participation in SSA countries as well as globally, the gains are stronger for SSA countries (Balie et al. 2019). Such differences also have implications for labor market outcomes. An event study suggests that wages increased most strongly in countries after they entered limited manufacturing GVCs compared to other forms of upgrading (World Bank, 2020).

# 4.1.2 Trade Policy Design to Manage Labor Market Disruptions

Besides a country’s type of trade protection and trade specialization there are aspects of the design and implementation of trade policy that can have labor market implications. Managing trade policy reform appropriately is an important part of an overall recipe for reconciling desirable economic ends—increased efficiency due to lower trade barriers—with the need for such changes to be politically sustainable, in the sense of not causing so much displacement and individual loss that attitudes become entrenched against reform, or even in favor of undoing it. This section discusses four areas of trade policy design that policy makers can influence, namely (i) prioritizing reform sectors, (ii) actively facilitating growth of the export sector, (iii) introducing reform gradually, and (iv) allowing for corrective action.

A fundamental question for any policy maker to ask is what kind of trade policy could both unlock significant aggregate economic gains and at the same time limit localized economic losses? The research cited above highlighted the importance of access to imported intermediates for trade and labor market outcomes, especially for when firms participate in GVCs. Focusing liberalization efforts on input markets can not only limit labor market adjustment costs—still an issue to the extent that there are substitutable rather than complementary inputs produced domestically—but even promote strongly positive labor market outcomes, as evidenced in Ethiopia (Ngoma 2022). A first key lesson is therefore that there may be important advantages in concentrating trade policy reform efforts on intermediate goods (and services) markets, but also on imported technology and machines required for domestic and export production more broadly. Indeed, some countries have already taken this lesson to heart through the use of tariff band systems, where intermediates and capital goods are either duty exempt or subject to lower rates. The East African Community uses such a system, for example, and while it is not free from issues due to dual-use goods and the potential for misclassification, it nonetheless has the potential to provide both a trade policy win and a boost to local labor market conditions.

Secondly, and linked to the first point, it is important to ensure that as import competition intensifies pressure on local producers, potentially with negative local labor market implications, the economy is capable of shifting resources to sectors in which it has a comparative advantage, so that exporters can grow and take on more workers. From a trade policy perspective, this approach means giving some scope to reciprocal reforms in partner countries, so that reduced import barriers are exchanged for reduced export barriers abroad. But it also means that it is important to encourage investment in export sectors. While such sector-specific complementary policies are addressed in more detail below, it is important to cite examples like investment promotion (Harding and Javorcik, 2011) and export 16