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How can promoting trade maximize labour market benefits?

Improving labour market outcomes and welfare through trade

Trade can create jobs, increase wages, and decrease informality. However, government interventions are needed to spearhead benefits, protect workers from global economic fluctuations, and extend the benefits to grassroots levels. 

Recent trade liberalization policies have been influenced by the belief that trade contributes to growth and employment. However, evidence from industrialized countries suggests that the effects trade on labour markets are not always positive1. These effects are increasingly felt in developing countries.There has been renewed interest in the effects of international trade on labour markets since the 2008 global economic crisis. The slowdown in international trade contributed to increased unemployment and informality2. These events have raised interest in better understanding the effects of trade promotion on labour markets. Several PEP research projects have contributed to filling this knowledge gap, providing insights on how to maximize gains and welfare from trade.

 

Unequal effects of trade liberalization 

In 2014, West African countries entered into an Economic Partnership Agreement (EPA) with the European Union, which resulted in cutting tariffs on EU imports. PEP researchers studying the effects of the EPA in Senegal found that the tariff cuts would lead to a contraction of the country’s economy. Effects include a significant decrease in Gross Domestic Product (GDP), a drop in domestic production, and an increase in unemployment (by almost 14.5 per cent). They found that young women would be affected the most by employment losses. Further, the same study found that household wellbeing will decrease as household revenue decreases. 

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.

 

Careful government interventions are needed to promote exports while supporting small producers

PEP researchers compared the experiences of Peru and Kenya’s avocado sectors in the face of rising global demand since 2006. They found that Peru’s avocado exports rose, while Kenya’s stagnated. 

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.

 

While trade promotion can promote growth and improve labour market conditions, the benefits from trade are often unequally distributed. Further, promoting exports can make the economy dependent on a few commodities and more vulnerable to external shocks. Benefits from trade are greater when accompanied by measures to support smaller players.  

 
Find out more about the projects featured
Country Project Documents
Cambodia MPIA-12387 Policy Brief 123 Assessing the impacts of trade liberalization on growth, employment and poverty in Cambodia
India MPIA-12598 Policy Brief 141 Trade liberalisation and employment effects in Indian manufacturing
Mongolia MPIA-12595 Policy Brief 138 A static CGE model of the Mongolian economy
Mongolia MPIA-19906 Policy Brief 182 Impact on the Mongolian economy of foreign direct investment in the coal export sector
Kenya and Peru PRESM Policy Brief 179 The Booming Peruvian Avocado Export Sector: Lessons for Kenya
Senegal MPIA 12868 Policy Brief 160 The impact of trade reforms on employment and wellbeing in Senegal
Vietnam PMMA-12673 Policy Brief 133 The effect of input-trade liberalization on farm and non-farm labor participation in rural Vietnam
External Sources

International Labour Office, 2011, Trade and employment: from myths to facts. Geneva: ILO. p.2

2 The International Labour Organization, 2014, Global Employment Trends 2014, Geneva: ILO. 

The World Bank and the International Labour Organization, 2019, Exports to Jobs – Boosting the Gains from Trade in South Asia, Washington: The World Bank. p.117

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