Lower Tariff, Rising Skill Premium in Developing Countries: Is it a Coincidence?

Abstract

Even though there are gains from international trade, there is still a case that trade opportunities have significant distributional consequences. This study considers the arguments that trade liberalisation and technological catch-up could raise the skill premium. The first argument has shown, in the North-South trade framework, that a reduction in import tariff may raise the skill premium if the tariff reduction causes the range of the traded goods in which export expansion occurs to be greater than the range of the traded goods in which imports expand. The second argument has shown that technological catch-up could raise the skill premium through export expansion. This paper presents an empirical study of developing economies from 1980 to 2005, which confirms that trade liberalisation raises the skill premium, whilst technological catch-up has an insignificant effect on the skill premium.