Impact of the US-China Trade War on Vietnam’s Labor Market

Trade can significantly reduce informality in developing countries by fostering economic growth and creating formal employment opportunities. A large proportion of workers in developing countries such as Vietnam work in the informal sector, making them vulnerable and less productive. This study examines the short-term impact of the US– China trade war as a positive demand shock on the informality of Vietnam's labor market, using nationally representative data from the Vietnam Labor Force Survey from 2017 to 2019. We create an industry-level measure based on variations in tariff increases applied to Chinese goods, representing the tariff advantages granted to Vietnamese firms. The estimation results show that workers in industries with higher tariff advantages are less likely to be employed as informal or uninsured workers. By applying Goldberg and Pavcnik’s (2003) framework, we interpret these findings as indicating that Vietnamese firms perceived the US–China trade shock as a positive and permanent demand shock. To our knowledge, the empirical evidence presented in this study represents a rare investigation into the effects of the trade war on the labor market of a non-participating country. Additionally, the findings offer important implications for other developing countries by showing how Vietnam’s labor market and informality improved as firms took advantage of the new trade opportunities created by trade diversion.