Dix-Carneiro and Kovak Trade Reform and Regional Dynamics

# **5.3 Alternative Hypotheses and Robustness**

The preceding subsection documented large regional effects of liberalization on formal earnings and employment. The scale of these effects grew steadily for more than a decade, indicating that outcomes continued to degrade in harder hit regions relative to more favorably affected regions for many years following the end of liberalization. As discussed in Section 4.1, this pattern is consistent with a model of regional labor markets with imperfect and slow adjustment of both labor and complementary factors such as capital. Here, we rule out a number of alternative explanations for the growing effects of liberalization to validate focusing on adjustment frictions and to demonstrate the robustness of our findings.

The effects of liberalization could appear to grow over time because of correlated shocks occurring after trade liberalization. To explain the smooth growth of the effects in Figures 4 and 6, such shocks would need to affect industries or regions similarly to liberalization and would need to grow steadily over time or occur quite regularly. Although these circumstances are unlikely, we construct controls for a number of salient economic shocks in the post-liberalization period, demonstrating that they are not driving our results.

If tariff changes after 1995 were correlated with those occurring during liberalization (1990-95), they might drive apparently increasing effects of liberalization. We calculate post-liberalization regional tariff changes as in (3), but use tariff changes between 1995 and year _t >_ 1995 as additional controls.<sup>26</sup> Table 3 Panel A replicates the earnings analysis in columns (3) and (6) of Table 1, including the post-liberalization tariff change up to year _t_ , along with _RTCr_ . The postliberalization control has the expected positive coefficient, but its inclusion has very little effect on the liberalization Another possible explanation for the steadily increasing regional effects of liberalization is slow adjustment in import or export markets. Although trade liberalization was implemented quickly and was complete by 1995, it is possible that importers and exporters responded slowly to trade policy changes, perhaps because of difficulty in forming trading links with firms abroad. If import and export quantities responded slowly, it could explain the slowly evolving labor market effects that we observe. To address this possibility, we follow Autor et al. (2013) (ADH) by constructing changes in imports and exports per worker (in $ 100,000 units) for each industry and year, and then form regional weighted averages analogous to (3).<sup>27</sup> Figure 9 plots the coefficients from regressing these ADH-style changes in imports and exports on regional tariff changes. If slow import and export adjustment were driving the slow evolution of liberalization’s effect on regional earnings, the export coefficients would exhibit a similar shape to the earnings coefficients in Figure 4, and/or the import coefficients would exhibit their mirror image. This is clearly not the case; between 1995

> 26We construct post-liberalization tariff changes using tariff data from UNCTAD TRAINS, as the Kume et al. (2003) tariff series ends in 1998.

> 27Imports and exports data are from Comtrade.

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