ChainWhat it assumes · how to break it
Start
The UK removes tariffs and quotas on trade with a partner through a free trade agreement, such as the UK–Australia agreement signed in 2021.
1
As a result, cheaper imports take market share from domestic firms in industries where the country has no comparative advantage, so their output falls.
import penetration · comparative advantage
import penetration · comparative advantage
Assumes: Domestic firms cannot match the price of imports.
But: Firms competing on quality, brand or speed of delivery may keep their customers despite cheaper imports.
2
This means demand for labour in those industries falls, because labour is a derived demand, and workers lose their jobs.
derived demand
derived demand
Assumes: Firms cut output by cutting labour.
But: Firms may cut wages or hours, or move workers to other product lines, instead of making them redundant.
3
Consequently, workers whose skills do not match the needs of expanding industries become structurally unemployed, often concentrated in particular regions.
structural unemployment · occupational and geographical immobility
structural unemployment · occupational and geographical immobility
Best link to attack
Assumes: Displaced workers cannot easily move into expanding industries.
Assumes: Displaced workers cannot easily move into expanding industries.
But: Where retraining is available and the expanding industries are in the same region, workers may find new jobs quickly.
4
At the same time, exporting industries expand and hire, and cheaper imports raise real incomes, so spending and jobs rise elsewhere in the economy.
export demand · real incomes
export demand · real incomes
Assumes: Exporters gain real access to the partner's market.
But: If the partner keeps non-tariff barriers, export industries expand slowly and create few jobs.
End
Unemployment rises in import-competing industries, while jobs grow in exporting industries over time; the net effect depends on how mobile labour is.
Evaluation chain
- E1However, how long the job losses last depends on how mobile displaced workers are.
- E2If workers have transferable skills, retraining is available and expanding firms are nearby, they move into new jobs within months.
- E3As a result, structural unemployment is short-lived. Where these conditions are missing it can persist, as in some US manufacturing areas hit by rising imports from China after it joined the WTO in 2001.
- E4So total employment may change little or rise in the long run where labour is mobile, but where it is immobile unemployment in affected regions can last a long time.
Job losses come quickly; job creation in exporting industries takes longer.
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Questions this answers
- Assess the impact of trade liberalisation on unemployment.
- Discuss whether free trade agreements create or destroy jobs.
- Explain why trade liberalisation may cause structural unemployment.
Diagram
Labour market diagram with demand for labour shifting left in an import-competing industry. Regional unemployment data make good evidence.
Reverse and related
Tariff imposed → jobs in the protected industry are kept, while steel-using and export industries may lose jobs (see tar-emp).