Description: Department Seminar

Location: 368A Heady Hall

Contact: John Crespi

Title: Structural Transformation in the Era of Trade Perfectionism

Abstract: The resurgence of trade protectionism among global powers often poses a grave challenge to the economic advancement of developing countries. This paper offers novel evidence demonstrating how protectionists trade policies can inadvertently create un-expected economic benefits for a bystander developing nation, potentially serving as a springboard for structural transformation. Leveraging the episode of the US-China trade war, this study uncovers that Vietnam has experienced a significant increase in its exports to the US, through the channel of trade diversion opportunities arising from the trade conflict. We also find that new FDI projects in the manufacturing sectors hit by the trade war have increased by about 30% compared to other FDI destinations amid the trade war. More importantly, our analysis reveals that such un-foreseen exposure to the trade war triggered significant structural transformation in Vietnam, manifested in (i) increased formality and skill upgrades at the firm level,(ii) mitigated labor market frictions through reallocation of high-skilled workers, and(iii) a labor shift from agriculture to manufacturing and informal to formal sectors in the regions more impacted by the trade war. This study highlights that the pathway toward structural transformation remains open for developing economies in the era of trade protectionism