Local and Spillover Effects of Trade on Structural Transformation: Evidence from Brazil

This paper presents novel empirical evidence on the impact of trade on structural transformation. Leveraging quasi-experimental tariff variation from Brazil's trade liberalization in the 1990s, we examine its effects on regional sectoral employment shares. Building on recent cross-regional macroeconomic literature, we approximate the aggregate effects of trade on structural change by extending the traditional shift-share analysis to include estimates of spatial spillover effects, beyond the commonly reported local or direct impacts. Our findings reveal that Brazilian regions directly exposed to larger tariff reductions experienced a significant decrease in manufacturing employment shares, an increase in the primary sector, and a decline in non-tradables. Spatial spillover effects—whether based on migration or gravity links—are positive for manufacturing and the primary sector but negative for non-tradables. While positive spillovers in manufacturing partially offset local deindustrialization, the net effects remain negative and economically significant. These effects persisted for at least twenty years post-liberalization and are independent of potential confounders, including alternative structural change hypotheses and other shocks to Brazil's economy during the study period. Our results are consistent with the theoretical literature on trade and structural transformation which emphasizes the significance of comparative advantage.