NATIONAL COLLEGE OF

BUSSINESS ADMINISTRATION &

ECONOMICS MULTAN
The Impact of International Trade Liberalization on
Unemployment, Poverty and Economic Growth of
China
Synopsis for M.Phil Thesis to be presented at NCBAE

By: Waqas Ali

CELL: 03043372196
Email: waqasgill581@gmail.com
SUPERVISED BY:
Honarable Dr. Wahid Ali Shah
Director of research Ecnomic Dept. NCBA

• Working Title:

The impact of international trade liberalization on unemployment, poverty and economic growth
of China

• Statement of Topic &Aims:

This study has focused the very important area of economics. In this study, we aim at finding the
impact of international trade liberalization on unemployment, poverty and economic growth in
China.
• Introduction:
Free trade and trade liberalization are the terms which are used interchangeably. Bringing the
tariffs down and removing other barriers in order to increase trade volumes define trade
liberalization. The economists consider trade liberalization as something of great significance for
driving globalization. The globalization and integration of world economy has lead to the fast
and observable growth in flow of services and goods between countries. However it is the trade
liberalization which is accused of and consequently cursed for unemployment and other ills, the
world is facing right now (Eddy, 2005).
Recent time has convinced many a countries into liberalizing their economies. According to
those who consider trade liberalization as something favorable argue that liberalization will be
beneficial for the workers in those countries. They opine that producers will be encouraged by
the abundant supplies of labor and would possibly like to reallocate their resources to the labor-
intensive goods. Employment and the share of wages in income are likely to increase as there is
increase in the demand for labor, depending on the condition in labor markets (Hassan, 2001).
The theoretical cogitations which derive their experience from East Asian countries are validated
by empirical evidence. On the flip side, the trade liberalization has helped in increasing the
wages and employment of a common worker in Latin America (Robbins, 1996, Wood, 1997).
There has always been a strong argument between those who are in favor of trade liberalization
and those who strongly oppose it, supported by different explanations. The classical assumptions
of technology have been questioned, while explaining its limitations as technology is thought to
be same across the countries in context of Heckscher-Ohlin theory. In the developing countries,
smaller proportions of total labor are skilled workers (Wood, 1997). It is very much likely that
the trade liberalization results in ever increasing gap between the wages of skilled and unskilled
workers.
Ricardian comparative advantage theory postulates that the country with relatively lower cost of
tradable goods and services, as compared to its trading partners, is said to have comparative
advantage over the country it trades as the former country has low opportunity cost of producing
that specific good. The output of the world will increase, if all the countries follow the theory of
comparative advantage, increasing cumulative welfare of the world. The world’s production
frontier will shift outward. Moreover, arguably trade liberalization would make production
processes more efficient as domestic producers will be brought to competition with international
producers, not to forget its political benefits. Trade liberalization integrated with technology will
increase the growth and development of a country as technology will bring with it induced
innovations in the domestic processes. India is a country which once used to face consequences
of inward and protectionist economy and its investment was confiscated to the growth of the
domestic economy only.
Trade liberalization is often regarded as an important instrument for boosting global economic
development. These countries' exports have significantly liberalized their economies, and as a
result, they have experienced the fastest GDP growth (Chaudhry and Imran, 2009). According to
standard trade theory, trade liberalization in developing countries would favor unskilled labour,
which is the most abundant source of productivity in those countries, resulting in poverty
reduction. However, if labor is unable to switch between markets, this impact would be stifled.
Workers in shrinking industries, for example, would be harmed. In addition, skilled labour is
more likely to benefit from the complementarity of inexpensive imported intermediate and
capital products than unskilled labor (Mitra, 2016).
On the contrary, some economists argue that the assumptions of the classical theory of trade are
hard to hold in the real world experience. In fact globalization has made it more difficult for
developing countries and small investors to thrive and in some cases it has become difficult to
survive. They characterize trade liberalization as something which has pushed the economies into
unemployment and poverty.
• Objectives and Research Questions of the Study
4.1 Objectives

The following will be the objectives of the study:

To analyze the impact of trade liberalization on unemployment of China

To examine the impact of trade liberalization on poverty of China

To analyze the impact of trade liberalization on economic growth of China

4.2 Research Questions

This study will answer the following research questions:

What is the impact of trade liberalization on unemployment of China?

What is the impact of trade liberalization on poverty of China?

What is the impact of trade liberalization on economic growth of China?

5. Literature Review

Ghazanfar et al. (2021) looked at the relationship between trade liberalization, economic growth,
and poverty in four SAARC countries (Bangladesh, India, Pakistan, and Sri Lanka). For the
period 1980-2019, data on inflation, trade liberalization, and economic growth were gathered
from the World Bank website. To investigate the connection between trade liberalization,
economic growth, and poverty, the ARDL (Autoregressive Distributed Lag Approach) method is
used. In the case of Bangladesh, the study discovered a strong short-term association between
trade liberalization and poverty, but no long-term relationship. When we used tariffs as an
indicator of trade liberalization, the effects were the same. In the case of India, there is no
substantial connection between trade liberalization and poverty, both in the long and short run. In
the case of Pakistan, there is no substantial short-term association between trade liberalization
and poverty, but there is a significant long-term relationship. In the case of Sri Lanka, there are
important short-term and long-term relationships.
Muhammad et al. (2020) investigated the effect of service trade liberalization on economic
growth by using country-level panel data. From 2000 to 2018, this research used annual country-
level panel data from 189 countries/regions. The econometrical technique fixed-effect model was
used to approximate the effects. The findings confirmed that trade in services liberalization has a
favorable and promising effect on the countries' economic development. Furthermore, human
capital, in combination with the liberalization of trade in services, has a strong impact on
economic growth.
Mohsen and Chua (2020) looked at the effect of trade liberalization on China's economy from
1980 to 2018. This research employs the Johansen cointegration and Granger causality tests, as
well as impulse response functions and variance decomposition analysis. GDP is favorably
linked to exchange openness, gross fixed capital investment, final consumption spending, and
inflation, but negatively related to oil price, according to the cointegration test. The causality test
shows short- and long-run bidirectional causality relationships between trade openness, oil price,
gross fixed capital investment, final consumption spending, inflation, and GDP. The finding also
shows that final consumption expenditure has the greatest impact on GDP, implying that raising
living standards, savings, and trade openness will all have a significant impact on economic
development.
Nwosa et al. (2020) looked at the relationship between trade openness and unemployment rates
in Nigeria. The study used time series data from 1980 to 2018. The auto-regressive distributed
lag (ARDL) methodology was used in the analysis, and the results indicate that trade openness
has a negative and substantial effect on Nigeria's unemployment rate. The finding showed that
trade openness creates job openings in Nigeria, lowering the country's unemployment rate.

Zeeshan et al. (2019) looked at the effect of trade and financial liberalization on Pakistan's
economic development. The findings were estimated using the Autoregressive Distributive Lag
model. The data used in the analysis ranged from 1973 to 2017. Export to GDP ratios and
exports plus imports to GDP ratios were used as trade liberalization indicators, while net foreign
direct investment as a percentage of GDP and central bank foreign reserves were used as
financial liberalization indicators. Both indices of trade liberalization were found to be
statistically significant and more elastic, while net FDI was found to be negligible and foreign
reserves held by the central bank were found to be statistically significant but less elastic.
Onakoya et al. (2019) looked at the connection between trade liberalization and poverty in 21
African countries from 2005 to 2014. To approximate the outcome, the researchers used the
pooled OLS methodology and the panel co-integration test. The results show that foreign direct
investment and the rate of inflation have a positive relationship with the human development
index, while exchange rates and trade transparency have a negative relationship with poverty at
the 5% level.
Hossain et al. (2018) investigated whether trade openness had an effect on unemployment in
Bangladesh. The research further examines the association between public education spending
and unemployment. Using VECM, the thesis investigates the relationship between
unemployment and trade openness in Bangladesh, using time series data from 1990 to 2016. The
results show a strong connection between trade openness and unemployment. In the long term,
investment in education reduces unemployment, while trade openness policies raise
unemployment.

Selwaness and Zaki (2015) strived to assess the impact of trade reforms on informal employment
in Egypt, incorporating a two-steps approach by Goldberg and Pavcnik (2003), using data for the
years 1998 and 2006. This was pioneer study of its kind in Egypt. The authors marked their
findings as the trade liberalization reducing informal employment in Egypt.

Sen (2009) tried to explore the causal relationship between the international trade and
manufacturing employment in India and comparing it to Bangladesh, Vietnam (Asian countries),
Kenya and South Africa (African countries). Sen used the same methodological approaches as
Jenkins and Sen (2006); Growth decomposition, labor demand modeling and the factor content
approach. Data from the period of 1975-1999 was taken for this study. The results surprised the
authors as the case study of India was similar to African countries and not Asian countries which
contradicted to Heckscher & Ohlin theory of international trade and international trade had
positive but less impact on employment in India which had surplus unskilled labor.

Egger and Etzel (2009) inquired into the impact of trade on employment, income distribution and
welfare. The authors used oligopolistic equilibrium model grounded in unionized labor market.
Moving from autarky to trade liberalization, trade increases welfare and employment. There is
not much change in firms’ owners’ profits but income of labor becomes more equal when an
economy opened up its trade.

Castro et al (2007) highlighted the impact of trade with India and China on Argentina’s
manufacturing employment by estimating effects of India and China on the industrial
employment of Argentina. In attempt to answering the questions, dynamic econometric model
was used whereas industry level data was taken for this purpose over the period of 12 years
ranging from 1991 to 2003. The study suggested that Argentina’s trade with India and China had
a negative but small impact on industrial employment.

Hoekman and Winters (2005) called attention to the causal relationship between trade, trade
policies and labor market outcomes. In the long terms, trade can increase more productive and
well paid employment opportunities. Employment impacts are not as great as wages reaction to
trade and reforms related with trade.

Bella and Quintieri (2000) made and analysis of the impact of trade on the manufacturing sector
of Italy, using competitive labor market model. The researchers used panel data for conducting
this research. The study investigated the changes induced in sales on wages and employment. It
was evident from the research that Italian labor market was not that much influenced by the
increased exposure to foreign competition. The technological change was major factor in
defining the increased employment.

Erlat (1999) put together his research on exploring the impact of import and export flows on the
change in manufacturing employment. The author of this research used Accounting-Identity
based approach for finding the relationship of the variables over four sub-periods further divided
ki far as employment was concerned and it was due to expansion of exports.

Greenway et al. (1998) investigated the impact of trade on employment in United Kingdom
extending his sample to 167 manufacturing industries using panel data from 1979 to 1991.
Instead of conventionally convenient models such as accounting decomposition method and the
factor content method, the authors used regression based approach in dynamic model of labor
demand. The study demonstrated that the output increased the demand for labor both in long and
short terms.

Matusz (1998) studied the impact of trade on employment in the USA, using and integrated
model of monopolistic competition merged with Shapiro-Stiglitz model of efficiency wages. He
used data from the Economic report of the president for the year 1994. The research made
conclusions as the increase in employment amplified the significance of trade.

Marquez and Pages (1997) appraised the impact of trade liberalization and economic reforms on
employment in Caribbean and 18 Latin American countries. The study resulted in the small but
negative impact of trade liberalization on employment growth.

Levy (1981) highlighted the impact of trade on the employment of Mexico, using input/output
model in a small open economy. The author used data from the year 1970 for his research. I was
found that with imported intermediate inputs, employment multipliers were not stable. When
compared to its imports, Mexican exports were more capital intensive.

Summary of Literature Review on the Impact of Trade on Unemployment, Poverty and

Economic Growth
Reference(s) Time Countr Methodology Results
Period y/
Region
Ghazanfar et 1980-2019 ARDL SAARC Trade liberalization negatively
al. (2021) influence the poverty levels.
Muhammad 2000 to 189 Fixed Effect The findings confirmed that trade in
et al. (2020) 2018 countrie Model services liberalization has a favorable
s dataset and promising effect on the countries'
economic development.
Mohsen and 1980 to China Johansen The causality test shows short- and
Chua (2020) 2018 cointegration long-run bidirectional causality
and Granger relationships between trade openness,
causality tests oil price, gross fixed capital
investment, final consumption
spending, inflation, and GDP.
Nwosa et al. 1980-2018 ARDL Nigeria The finding showed that trade
(2020) openness creates job openings in
Nigeria, lowering the country's
unemployment rate.
Zeeshan et al. 1973-2017 ARDL Pakistan Trade liberalization were found to be
(2019) statistically significant and more
elastic, while net FDI was found to be
negligible and foreign reserves held
by the central bank were found to be
statistically significant but less
elastic.
Onakoya et 2005-2014 Pooled 21 African The results show that foreign direct
al. (2019) OLS Countries investment and the rate of inflation
have a positive relationship with the
human development index, while
exchange rates and trade transparency
have a negative relationship with
poverty at the 5% level.
Hossain et al. 1990-2016 VECM Bangladesh The results show a strong connection
(2018) between trade openness and
unemployment.
Selwaness & 1998 & Egypt 2-steps Trade liberalization resulted in
Zaki (2015) 2006 analysis reduced informal employment in
approach by Egypt.
Goldberg &
Pavcnik (2003)
Egger and German General
Etzal (2012) y equilibrium
model with
unionized
labor market
Sen (2009) 1975-1999 India Labor demand The trade had positive but not
modeling, the significant impact on employment in
factor content India.
approach and
growth
decomposition
Castro et al 1991-2003 Argentin Dynamic
(2007) a equilibrium
model
Hoekman Europe
and Winters
(2005)
Bella & 1975-1989 Italy Competitive It was evident from the research that
Qyuniteri Labor market Italian labor market was not that
(2000) model much influenced by the increased
exposure to foreign competition. The
technological change was major
factor in defining the increased
employment.

Erlat (1999) Pre- and Turkey Accounting- Trade had significant impact on the
post-1980 Identity based employment in post-1980 era
era approach
Greenway et 1979-1991 United Dynamic The output increased the demand for
al (1999) Kingdo model of labor labor both in long and short terms
m demand
Marquez and 1970-1996 USA & Trade liberalization had negative but
Pages (1998) Caribbe small impact on employment growth
an
Matusz 1994 USA Employment The trade brings the benefits in the
(1998) effects of trade case of increase in employment
Levy (1982) 1970 Mexico Input/output Mexican exports were more capital
model intensive when compared to its
imports

• Data and Methodology

The annual time series data in case of China from time period 1980 to 2018 will be employed.
The data will be collected from World Development Indicators. Unit root analysis will be
conducted by using ADF test, this test ensure the appropriate technique for long-run analysis.
Based on the unit root estimates OLS, ARDL or Johansion co-integration test will be applied on
data. The descriptive, correlation and causality analysis will also be conducted.
• Model Specification:
Model 1: Impact of Trade liberalization on Economic Growth in China

Model 2: Impact of Trade liberalization on Unemployment in China

Model 3: Impact of Trade liberalization on Poverty in China

Table 2: Description of Variables
Variable Variable’s Descriptions Source
Dependent Variables
ECG Economic Growth GDP Per Capita WDI
UER Unemployment Rate Rate WDI
POV Poverty Head Count Index WDI
Independent Variables
TL Trade Liberalization Trade as a percentage of GDP
GCFC Gross Fixed Capital Gross fixed capital formation as a WDI
Formation percentage of GDP
FDI Foreign direct As a percentage of GDP WDI
investment
AGP Agriculture As a percentage of GDP WDI
productivity

8. Chapter Outline & Dissertation Breakdown:

Chapter 1 Introduction
Chapter 2 Literature Review
Chapter 3 Methodology
Chapter 4 Results and Discussions
Chapter 5 Conclusions and Future work/recommendation

References
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• Sen, K. (2009). International trade and manufacturing employment: Is India following
the footsteps of Asia or Africa?. Review of development economics, 13(4), 765-777.
• Egger, H., & Etzel, D. (2012). The impact of trade on employment, welfare, and
income distribution in unionized general oligopolistic equilibrium. European
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• Hoekman, B., & Winters, L. A. (2005). Trade and employment: stylized facts and
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• Levy, S. (1982). Foreign trade and its impact on employment: The Mexican
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