Trading protection for jobs in South Asia

South Asia struggles to create enough jobs for its growing population. Employment ratios—employment in percent of the population aged 15 or older—in South Asia, particularly in the non-agricultural sector and for women, are among the lowest worldwide. At the same time, South Asian countries remain among the most closed to international trade, in part reflecting high tariffs and non-tariff barriers.

As trade policy is being re-evaluated around the world, including in South Asian countries, labor market implications of policy changes are factoring into these considerations. The latest South Asia Development Update: Jobs, AI, and Trade shows that tariff reductions, especially in the context of free trade agreements, could boost job creation, particularly in manufacturing and for younger and higher skilled workers.

International experience

Historically, trade has been an engine of job creation. Trade openness has been associated with higher long-run employment ratios in the non-agricultural sector, greater female employment shares, and higher labor productivity (Artuç et al. 2019; Irwin 2025; World Bank 2024a, b).

Past episodes of major tariff reductions were typically accompanied by significant increases in aggregate employment, with benefits disproportionately rewarding higher-skilled and younger workers, and firms in the manufacturing sector (figures 1A, B). Employment or wage gains were greater after reductions of tariffs on intermediate inputs than after general tariff reductions.

Tariffs and jobs in South Asia

About 39 percent of South Asia’s workers are in sectors that are sheltered by tariffs above 30 percent, most of them in agriculture. Yet, the most dynamic parts of South Asia’s labor markets are those that are least sheltered by tariffs (figures 1C, D). Over the past decade, sectors with tariffs below 5 percent have

• generated more than three-quarters of South Asia’s employment growth, although they employ only one-third of its workers.
• paid 16 percent higher wages than the average job and tended to employ younger and more skilled workers.

South Asia’s tariffs on intermediate inputs are currently twice as high as in other emerging market and developing economies. These tariffs, different from tariffs on imported final goods, encumber production and reduce competitiveness of South Asia’s exporters in international markets.

Sources: ADB Multiregional Input-Output Tables (database); Global Labor Database; IMF World Economic Outlook (database); World Development Indicators (database); WTO Analytical Database; World Bank.

Note: BGD = Bangladesh; EMDEs = emerging market and developing economies; IND = India; LKA = Sri Lanka; SAR = South Asia.

A. Impulse response function from a local projection estimation of cumulative changes in log employment on the start of tariff reduction episode. Episodes are defined as the largest decile of one-year and five-year tariff reductions among up to 122 countries with 31 countries experiencing 33 tariff reduction episodes. Dotted lines show 95 percent confidence intervals.

B. Based on a review of 83 studies on the domestic effect of trade liberalization using empirical estimates. Bars show the estimated marginal likelihood that impact of tariff cut on employment or wages is statistically significantly more positive by worker characteristics. Whiskers show the one-standard-error band on the estimated likelihood. A “skilled” worker is as defined in study, or is white collar or non-production worker, or has completed at least upper secondary school. A “young” worker is below the age of 30.

C. Figure reports simple averages of the ad valorem most-favored-nation duties applied. South Asia comprises latest data for all 6 countries in the region, and “other EMDEs” comprises 6 comparator countries. For Sri Lanka, data include para-tariffs.

D. Sample is restricted to Bangladesh, India, and Sri Lanka due to employment data availability at the two-digit level between 2010–14 to compute growth rates for at least a decade.

Broader trade agreements in South Asia

Tariff cuts, frontloaded on intermediate inputs, could improve South Asia’s competitiveness and boost job creation, especially if implemented in conjunction with broader trade agreements. Several South Asian countries are currently in negotiations of such trade agreements. India, for example, is in trade negotiations with Australia, Canada, the European Free Trade Association, the European Union, the Gulf Cooperation Council, the United Kingdom, and the United States. Bangladesh is in negotiations with Korea and Japan, and negotiations with China, Malaysia, and the United Arab Emirates, are expected to start soon. Sri Lanka is in negotiations with China and aims to join the Regional Comprehensive Trade Agreement (RCEP).

Policy implications: Support for labor mobility

An ambitious trade reform that cuts South Asia’s import costs by half relative to other EMDEs could generate double-digit growth in exports and imports, and raise real per capita income by 1.2 percent. The income gains would be significantly larger if the trade reform is combined with measures that make it easier for workers to switch to higher-paying jobs in expanding sectors. Even a modest reduction in workers’ job switching costs—such as lower job search costs, more retraining, and reduced regulatory constraints—by 5 percent could double the real per capita income gains from the trade reform alone.

Policy implications: Managing revenue impact

Trade-related tax revenues account for a higher share of total tax revenue in South Asia than in other EMDEs. Trade reforms can lower revenues from trade, as import tariffs are lowered, although this tends to be offset by rising trade. Indeed, episodes of major tariff cuts during 1980–2024 were associated with small—but statistically significant—declines in trade revenue, by less than 0.1 percentage point of GDP on average. Yet, total tax revenue remained broadly flat during these episodes, as increases in non-trade tax revenue offset these small declines in trade revenue. In four-fifth of the countries with increases in non-trade tax revenue, the increase was achieved without raising non-trade tax rates. Efforts to broaden non-trade tax base and make tax administration more efficient can help support non-trade tax revenue during trade reforms.

Sources: ADB Multiregional Input-Output Tables (database); Haver Analytics; IMF Government Finance Statistics (database); UNU-WIDER; World Bank Fiscal Survey; World Development Indicators (database); WTO Analytical Database; World Bank.

Note: A. Panel shows real GDP per capita gains in South Asia from halving import barriers (relative to other EMDEs) and reducing job-transition costs by 5 percent. General equilibrium effects are estimated using a dynamic multi-sector open-economy model following Caliendo, Dvorkin, and Parro (2019). The model is calibrated in changes relative to 2023 data for 73 economies, including a rest-of-world aggregate.

B. Bars show the difference in the annual average revenue-to-GDP ratio between the first 5 years of an episode and all years outside of episodes, derived from a country fixed effects regression. Episodes are defined as the largest decile of tariff reductions in both the first year and over a five-year period among 122 countries, of which 31 countries experienced 33 tariff reduction episodes. Tax revenue excludes social security contributions and grants. Whiskers indicate 90-percent confidence intervals.

Policy implications: Sequencing of policies

To unlock gains from trade reforms for most workers, governments could smooth the labor market adjustments by carefully sequencing tariff cuts, starting with tariffs on the most widely used intermediate inputs. The highest tariffs, which affect a large share of the workforce, could be lowered more gradually. Complementary policies could improve connectivity, upskill workers, remove obstacles to firms’ growth, and strengthen social safety nets for vulnerable groups.