How can promoting trade maximize labour market benefits?

Two separate PEP studies found evidence that trade liberalization results in the reallocation of workers. These effects are partly influenced by the policies adopted by governments following trade liberalization. Joining the Trans-Pacific Strategic Economic Partnership Agreement (TPP) means Vietnam must lower tariffs on imports. A team of PEP researchers in Vietnam showed that a decrease in fertilizer prices can lead to workers from the non-farm sector moving to jobs in the farm-sector, such as agriculture. Studying the effects of trade liberalization on the economy in Cambodia, PEP researchers found that complete tariff elimination results in the expansion of the country’s production, boosted by increased exports and imports. However, household incomes and consumption remain unchanged. The research team also showed that increasing domestic taxes to adjust for the lost revenue due to tariff elimination changes the structure of production from agriculture and services to industry. Further, the levels of welfare for people living in remote provinces decreases.

In Peru, the government encouraged the involvement of large-scale companies through labour regulations, land tenancy frameworks, fiscal interventions and collective action. In addition, the government facilitated trade agreements and invested in improving supportive public infrastructure—including connectivity and irrigation—and complementary services, such as facilities that control for plant health (phytosanitary conditions). In contrast, Kenya’s avocado production remains the domain of-scale farmers who receive uncompetitive prices from brokers. 

The main beneficiaries of Peru’s export growth are large companies. Smallholders derived limited benefits through production associations and contract farming with large plantations. The PEP researchers recommended greater government intervention to help small-scale farmers seek market opportunities collectively. These recommendations resonate with those of a 2019 World Bank study in India³ that calls for greater government interventions to encourage labour-intensive industries, increase skills, invest in infrastructure and eliminate distortions in production. These recommendations were based on findings similar to those from PEP: the gains from trade are not shared broadly.

Promoting exports creates jobs but leaves the economy vulnerable 

PEP researchers in India showed that trade liberalization created jobs for unskilled and semi-skilled workers, and for male workers during the 2004-7 period. However, between 2008 and 2011, these effects became statistically insignificant, most likely due to the global financial crisis and the resulting slow demand for exports. 

Similarly, PEP researchers found that the benefits of trade promotion in Mongolia are vulnerable to adverse price shocks. The PEP research team showed that an increase in the mining sector’s land and capital stock—to simulate the effects of export promotion—results in higher GDP, increased exports, and greater employment in the coal sector. However, the same study found that a large adverse shock to international metal ore prices has effects far beyond the mining sector: it can reduce production and employment in almost all sectors of the Mongolian economy. Another PEP research project in Mongolia found investing in a railway to improve the productivity of the coal sector and promote trade, can foster growth and job creation. However, this action will also make the economy more dependent on the coal sector.