Published on Let's Talk Development

U.S. market access generated jobs in manufacturing and services and reduced income inequality in Vietnam

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Amid the recent rise of populism and protectionism, the labor market implications of trade have increasingly moved to the center of political and economic debates. Autor et al (2013), in an influential paper, find that U.S. regions that are more exposed to import-competing manufacturing industries witnessed larger declines in manufacturing employment and wages. 

In our recent research (Hoang and Nguyen, 2018), we examine the effects of U.S. market access on local labor markets in Vietnam, in the context of the U.S.-Vietnam bilateral trade agreement (BTA) in December 2001. As a part of the BTA, the United States granted Vietnam most-favored-nation (MFN) access to the U.S. market. Vietnamese goods immediately benefited from large, sudden and across-the-board U.S. tariff cuts, whereas the commitments from Vietnam were more gradual and mostly not related to tariffs.

In Vietnamese provinces more exposed to industries that benefit from U.S. tariff cuts, more new manufacturing jobs were created between 2001 and 2003. It is probably not surprising that manufacturing jobs and wages would increase after access to the U.S. market. More interestingly, in those provinces, new jobs are also created in many other local service sectors, reflecting strong spillover effects of new job gains in the local economies. These new employment opportunities attract labor from agriculture, reducing agricultural employment.

Three potentially important channels of job gain spillovers are examined. The first channel operates via demand-driven propagation. That is, newly employed manufacturing workers could increase spending on local services, such as wholesale, retail and restaurants, generating new jobs in local commerce. The second channel operates via production linkages, that is, via higher demand for inputs from manufacturing production. Expanding production activities of the manufacturing sector could require more input from local supporting service industries, such as accounting, tax and other consulting, architecture, advertising, protection, housecleaning or packaging. This would help create more jobs in the supporting service sectors. The third channel operates via increasing real estate and construction activities, benefiting from, for example, a house price appreciation. While there is evidence for all three channels, the demand channel is the most quantitatively important.

Furthermore, we examine the impact of U.S. market access on income. Despite a decline in agricultural employment, agricultural income per capita does not fall after the implementation of the bilateral trade agreement. This suggests that the agricultural sector becomes more productive in response to labor reallocation to non-farm sectors. At the same time, non-farm income per capita significantly increases, leading to a substantial overall household income growth.

Finally, we find that the BTA has a more positive impact on employment of females, and poor and rural households. The findings seem to suggest that the BTA carried an important distributional implication: it helped reduce employment and income gaps between males and females, between poor and rich households, and between rural and urban ones.

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