Association for Public Policy Analysis & Management

Trade liberalization has been seen as a common solution for poverty reduction and economic growth for developing countries. An important question is how it affects human capital accumulation, a main driver of sustained economic development. Our paper studies the impacts of the U.S.-Vietnam Bilateral Trade Agreement (BTA), which came into effect in 2001, on Vietnamese families’ investment in human capital of children. The principal change the BTA made is lowering the U.S. tariffs to Vietnam’s exports from 40 to three percent on average.

Free trade could impact families’ investment in their children’s human capital through job creation. Consequently, household living standard would be improved, leading to increases in education and healthcare spending. Meanwhile, presenting greater job opportunities would draw children into engaging in the formal labor market or into unpaid work to replace family members who enter the paid labor market, thus causing a decline in schooling. Besides, improved living standard might result in healthier children and then reduction in healthcare expenses. The net impacts of free trade on investment in children’s health and education are therefore theoretically ambiguous.        

To evaluate the impacts of trade, we use a multiple-time period difference-in-differences approach, and exploit the variation in provincial tariff cuts, which range from 8 to 32 percentage points. The main data for analysis come from five waves of Vietnam Household Living Standard Survey, which covers two time points before (1993 and 1998) and three time points after the BTA passage (2002,  2004 and 2006). There are several threats to the internal validity of our approach. First, if there were unobserved, time-varying factors that were correlated with the tariff reduction and affected the outcomes in each province, our estimates would be biased. We directly test this identification concern by examining the correlation between the tariff cuts and changes in the outcomes in the period 1993-1998 in our specifications. The pre-BTA coefficients are small and statistically insignificant, providing evidence to support our research design. Second, inter-province mobility if existed would bias our estimates towards zero. By estimating the BTA effects on provincial population, we verify that there is no evidence of this mobility.

We find that living standard was significantly increased as a result of the agreement. The average provincial tariff reduction of 11.2 percentage points are associated with an approximately 20 percent increase in household expenditure. Although children did not engage more in the paid labor market, they were approximately 23 percent more likely to be drawn into performing unpaid labor. Besides, while school enrollment had considerably been risen nationwide, the averagely affected province saw a 5-10 percent decline relative to the overall trend in school attendance. However, families in this province were 10 percent more likely to spend on health care of children ages 0-6.

The estimates are robust to various specifications and different approach of measuring provincial tariff reduction. Our findings imply that children living in provinces with greater tariff declines would have better health but suffer poorer education when they enter the labor force in the future.