One of the core benefits of trade liberalization is that it removes the anti export bias in economies with high levels of protection which will depreciate the real exchange rate and allow export sectors to compete more effectively for domestic factors of production. This not only implies that export intensive sectors might benefit disproportionately from trade liberalization and are likely to expand in the medium to long term, but also that an assessment of the short-term aggregate impact of a liberalization scenario may be subject to a systematic upward bias.<sup>25</sup> These concerns are less of an issue with respect to relative sectoral impacts of tariff reform. Given its nature as a partial equilibrium model, the purpose of TRIST in contributing to the analysis of trade reform adjustment costs in terms of output and employment is thus to identify sectors that are likely to be hardest hit as part of the direct short term adjustment to increased competition in import markets and to contribute to the design of policy interventions that seek to cushion these direct adjustment costs.<sup>26</sup>

# _Production and employment_

The impact of trade reforms on domestic production and in particular employment has been one of the most politically sensitive issues in the discussion on adjustment costs. The desired long run result of trade liberalization is the reallocation of production factors (labor and capital) to more productive uses, thus involving changes in the pattern of production and employment among and within firms, industries and regions. In the short run, however, production in import competing sectors will likely decline, which may have social and political costs. A better understanding of these effects is central to effective sector- and region-specific trade policy making that mitigates these adjustment costs.

TRIST gives an indication of those sectors that are likely to be most affected by short term adjustment costs to tariff reform by presenting changes in prices for each sector. Those sectors facing the largest decline in prices are those that will tend to face the biggest adjustment. However, this analysis can be considerably enhanced and deepened if there are detailed sectoral production and employment data. Production and employment data<sup>27</sup> can be uploaded into the _simulation tool_ and TRIST will automatically amend the model to include the domestic substitution effect as well as present sectoral changes in domestic production and employment that result from the trade policy scenario of interest.

25 Although the export impact is likely to not happen in the short run and to be delayed relative to the import impact of a tariff reduction, the real exchange rate impact of a given reform may happen very soon in countries that face serious foreign exchange constraints, thus limiting the negative impact on import competing sectors in the absence of (foreign exchange depletion -) offsetting export expansion. 26 Another reason why TRIST cannot be used to assess the aggregate impact of trade reform on output and employment is that the data typically are available for industry only and exclude output and employment in agriculture and services - by far the biggest sources of employment in most developing countries. 27 As only goods that remain in the domestic market compete with imports, it is necessary to delete exports from the value of domestic production and to only include domestic production exclusive of exports in the model. A detailed explanation of the necessary steps is available upon request.

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