Local and spillover effects of trade on structural transformation: Evidence from Brazil

This paper investigates the impact of trade liberalization on structural transformation, using quasi-experimental tariff reductions from Brazil's 1990s reforms. Building on recent cross-regional macroeconomic literature, we extend the traditional shift-share framework to estimate both local and spatial spillover effects on sectoral employment shares, providing insights on aggregate outcomes. Regions more exposed to tariff cuts saw declines in manufacturing employment, increases in the primary sector, and reductions in non-tradables. Spillover effects—mediated through migration or proximity—partially offset local deindustrialization in manufacturing but amplified declines in non-tradables. These effects persisted for over twenty years and proved robust to alternative explanations, including competing structural transformation hypotheses and other economic shocks during the period of analysis. Overall, our findings support theories highlighting comparative advantage as a potential driver of trade-induced structural transformation.