Industry and trade

The impact of trade on employment in the Sustainable Development Goals

The impact of trade on employment in the Sustainable Development Goals

Employment was an afterthought in the Millennium Development Goals (MDGs). It was not part of the original goals but was added in 2008, halfway through the implementation period. It is, however, a key element of the Sustainable Development Goals (SDGs). Goal 8 encourages countries to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.” There are eight employment-related targets and ten specific indicators (United Nations 2015).

Trade, on the other hand, is much less central to the SDGs. It is referred to in half a dozen places and its only concentrated reference is in Goal 17, the final one on a global partnership for sustainable development. Within that goal, trade competes for space with other hefty topics including finance, technology, capacity building, and systemic issues.

But trade may have an important role as an “enabler” that supports the achievement of other goals. The specific relationship between trade and other goals is not spelled out in the SDG document. Our recent research has sought to map the relationship between trade and employment to see whether trade can help achieve the employment objectives of the SDGs (Vandenberg 2017).

Gains from trade

Trade encourages economies to specialize in the production of goods and services for which they have a comparative advantage and to import other goods and services that they need. This specialization generates welfare gains for the whole economy. Such gains can support economic growth and thus increase the demand for labor. Therefore, in an indirect manner, increased trade can support the employment quantity aspect of the SDGs.

Trade theory and most empirical studies focus on adjustments that are caused by trade. Some industries and firms expand (i.e., those with comparative advantage) and others decline. Standard trade theory assumed that the movement of labor from one sector to another is frictionless and occurs automatically, maintaining full employment. More recent work has sought to unpack this transition and to dispense with the notion that it is frictionless. Unemployment can occur and its duration will be affected by people’s willingness to move to take up new jobs and the labor market policies in place. Avoiding onerous labor regulation and providing information on new job opportunities help to support workers to transition and reduce the time between jobs. Developed countries have set up programs to support workers who have lost their jobs due to trade competition and to help them retrain and find new employment. The two most well-known programs are the Trade Adjustment Assistance (TAA) program in the United States (US) and the European Globalisation Adjustment Fund (EGF), although the impact of these programs in terms of supporting labor is probably less than might be desired. We are not aware of developing countries with such programs.

Trade has certainly helped many developing countries expand employment, with the People’s Republic of China as a prime example. Export-oriented garment production, electronics and automobile assembly, and other types of labor-intensive industries in South Asia and Southeast Asia have also created jobs. Some economies, such as Hong Kong, China, have seen a movement of workers from manufacturing to services as a long-term result of shifting comparative advantage. Hong Kong, China now makes very few of the goods it consumes. At the same time, there are examples of sectoral employment losses as a result of trade. Farm employment declined in Mexico as a result of freer trade within North America. As well, competition from the People’s Republic of China has generated job losses in the northern parts of the US, fueling a trade backlash that probably tipped the results of the recent US elections.

Improving the quality of employment

Trade may have an impact on the quality of employment, although the evidence does not provide a consistent picture. The SDGs call for shift from informal to formal employment. Studies on trade opening episodes in developing countries, notably in Latin America, provide mixed evidence on whether liberalization helps or hinders formalization. On the positive side, trade competition may encourage firms to formalize in an effort to meet the competition from imports and to break into export markets. On the negative side, trade pressurizes firms to cut costs and they may respond by shifting work from their operations (or their formal suppliers) to informal enterprises.

The SDGs also call for the elimination of the more egregious forms of employment, including forced and child labor, modern slavery, and human trafficking. The connection between such practices and trade is much less studied. It does appear that trade openness is linked with lower levels of child labor, but this link tends to fade when country income is taken into account (Edmonds and Pavcnik 2004). As such, economic growth rather than trade may be a better formula for getting kids out of the workforce and into school. Nonetheless, when trade supports growth, it may indirectly reduce child labor.

What trade can do more directly is put the spotlight on labor practices. This occurs when products from developing countries are sold in developed countries. European and North American nongovernment organizations, consumer groups, and the media frequently probe the labor practices of companies producing shirts, shoes, chocolates, palm oil, and other products (BBC News 2016). When these products are bought by or produced on contract for large multilateral companies and retailers, the buying companies can be shamed if they source from firms employing child labor.

Trade and other policies

Overall, the balance of past evidence suggests that trade will likely assist—and in the least not hinder—the achievement of the employment objectives of the SDGs. Countries should probably not rely on trade alone, however, but combine trade policies with labor market and business environment policies to meet their objectives on job quantity and quality.

BBC News. 2016. Amnesty Links Palm Oil Used in Household Goods to Child Labour in Indonesia. 30 November.
Edmonds, E., and N. Pavcnik. 2004. International Trade and Child Labor: Cross-Country Evidence. NBER Working Paper No. 10317. Cambridge, MA: National Bureau of Economic Research.
United Nations. 2015. Transforming Our World: The 2030 Agenda for Sustainable Development. Resolution adopted by the General Assembly on 25 September 2015, 70th session, 70/1.
Vandenberg, P. 2017. Can Trade Help Achieve the Employment Targets of the Sustainable Development Goals? ADBI Working Paper forthcoming. Tokyo: Asian Development Bank Institute.

Paul Vandenberg

About the Author

Paul Vandenberg is a Senior Economist in the Economic Research and Regional Cooperation Department of the Asian Development Bank.
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