Impact of Trade Liberalization on Household Welfare: An Analysis Using Household Exposure-to-Trade Indices

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.