Impact of Trade Liberalization on Household Welfare: An Analysis Using Household Exposure-to-Trade Indices
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Impact of Trade Liberalization on Household Welfare: An Analysis Using Household Exposure‑to‑Trade Indices Thang T. Vo1 · Dinh X. Nguyen1 Accepted: 17 September 2020 © Springer Nature B.V. 2020
Abstract This paper quantifies the impact of trade liberalization at the household level using data from the Vietnam Household Living Standard Survey from 2002 to 2016. Household welfare is measured using income, expenditure, and vulnerability to poverty. Unlike previous studies, we address potential endogeneity at the household level by constructing household exposure-to-trade indices as a proxy for trade liberalization. These indices are advantageous as they capture the influence of trade liberalization at the national level and the households’ ability to respond to new opportunities. The results suggest that trade liberalization improves Vietnamese household income and expenditure via the export channel or the expansion of labor demand. Tariff reduction for exported goods is less favorable to household welfare. The impact of trade liberalization became smaller and less significant after the global downturn in 2008. Rural households suffered more vulnerability from trade, and the poor gained fewer benefits after the financial crisis in 2008. Keywords Trade liberalization · Trade exposure · Household · Vulnerability to poverty · Welfare · Vietnam
1 Introduction International trade has long been accepted as a critical driver of economic development, especially over the long run (Onafowora and Owoye 1998; WTO 2001; Winters et al. 2004; Wacziarg and Welch 2007; George 2010; Naito 2017; Fukuda 2018), even in times of crisis (Falvey et al. 2012). Trade provides developing countries opportunities to accelerate economic growth, improve welfare, and reduce poverty, especially when major exports are labor-intensive products such as agricultural and basic manufactured goods. With fewer trade barriers, the domestic market is enlarged with various products and better choices in
* Thang T. Vo [email protected] Dinh X. Nguyen [email protected] 1
Health and Agricultural Policy Research Institute, University of Economics Ho Chi Minh City, 279 Nguyen Tri Phuong, District 10, Ho Chi Minh City, Vietnam
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price and quality. Exporting firms are more likely to employ additional low-skilled workers, which is expected to considerably impact poverty reduction. However, the empirical impact of trade liberalization on poverty, welfare, and inequality is far from consistent. First, while the impact of trade liberalization on income is often positive at the national level, it may vary between regions within a country (Law 2019; Popli 2010). Regions with a higher proportion of sectors exposed to trade openness tend to experience a greater decline in poverty (Kis-Katos and Sparrow 2015; Popli 2010; McCaig 2011). However, urban areas with a greater share of workers in high tariff industries might have a smaller reduction in poverty and inequality once tariffs are reduced (Castilho et al. 2012).
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