Exports to China and Local Employment in South Korea

• Published date: 01 March 2022
• Author: Jiyoung Kim,Sun Go
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/cwe.12415

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 197–214, Vol. 30, No. 2, 2022 197

Exports to China and Local Employment

in South Korea

Jiyoung Kim, Sun Go*

Abstract

We estimate the effect of exports to China on local employment in South Korea,

exploiting variations in trade and employment across 220 South Korean municipalities

between 2007 and 2017. To identify the effect of exports on employment, we use a

novel instrument: China’s exports to the US. This isolates the demand-side factors

for South Korean exports to China from the supply-side factors that lead to biased

estimations using ordinary least squares regressions. The results of a two-stage least

squares estimation using municipality-level data confirm that increased exports to

China contribute to a rise in employment in South Korean local labor markets. This

effect occurs mostly in the service and construction industries rather than in the

manufacturing sector.

Keywords: export to China, local employment, intermediate goods, international trade,

service industry

JEL codes: F16, J23, O14, R12

I. Introduction

South Korea’s exports to China have grown signifi cantly since the early 2000s, making

China South Korea’s largest trading partner. We evaluate the impact of the growth

of exports to China on local employment empirically by exploiting variation across

220 South Korean municipalities during the period 2007 to 2017. A key challenge in

estimating the effect of exports on employment is possible endogeneity between trade

volumes and local labor markets. We tackle this issue using a novel instrument, namely

the constructed local impact of China’s exports to the US, to isolate China’s demand

for South Korean exports of intermediate goods from the supply-side factors of South

Korean exports to China, which also affect local labor markets.

*Jiyoung Kim, Associate Professor, School of Northeast Asian Studies, Incheon National University, South

Korea. Email: jykim@inu.ac.kr; Sun Go (corresponding author), Associate Professor, School of Economics,

Chung-Ang University, South Korea. Email: sungo@cau.ac.kr. This work is supported by a research grant

from Incheon National University.

Jiyoung Kim, Sun Go / 197–214, Vol. 30, No. 2, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

198

The relationship between trade and employment has long been a major research

topic in international economics and labor economics. In the US, scholars consider trade

expansion to be a possible driver of the decline in employment in the manufacturing

sector (Revenga, 1992; Sachs et al., 1994). More recently, economists have argued

that the rise in Chinese import competition has caused a signifi cant reduction in jobs

in the US (Autor et al., 2013, 2016; Acemoglu et al., 2016; Pierce and Schott, 2016;

Caliendo et al., 2019). Several other studies have examined the effects of growing import

competition on domestic labor markets. For example, Biscourp and Kramarz (2007)

study this issue in France, and Mion and Zhu (2013) conduct a fi rm-level analysis of

Belgium.

However, if both exports and imports are considered, the mechanism through which

trade affects the labor market becomes more complicated. For example, Dauth et al. (2014)

analyzed the effect of Germany’s rapid expansion of trade with China and Eastern

Europe, fi nding that sectors that were severely hurt by import competition experienced

a job reduction, whereas exporting sectors enjoyed a sizable increase in employment.

Costa et al. (2016) studied Brazil and found that, although import competition with

China led to slower growth in manufacturing wages, greater demand for Chinese

exports was associated with more jobs and higher wages. More recently, analyzing data

from the US, Feenstra and Sasahara (2018) and Feenstra et al. (2019) found that the

growth of exports has a large effect on creating jobs, and can dominate the negative

effect of import penetration in local labor markets. Applying the method described by

Acemoglu et al. (2016) to South Korea, Choi and Xu (2020) found that the increase in

import competition with China led to more jobs in the manufacturing sector. However,

this implies that their result may include a hidden positive effect of export growth

accompanied by the increase in import competition.

Our research extends the literature to include South Korea, one of the world’s

largest trading countries, focusing on its exports to its largest destination country, China.

We distinguish the labor-market effect of exports to China from other countries because

the effects can be diverse across destination countries. Previous literature has suggested

that the effects of exports on employment can be heterogeneous across destination

countries because these effects can vary across exporting sectors (Brambilla et al., 2012;

Bastos et al., 2018; Sasahara, 2019). Indeed, the heterogeneity in trading sectors’ value-

added content can lead to a differentiated effect of exports on employment (Shen and

Silva, 2018).

Because labor market adjustment to international trade typically takes several years

(Dix-Carneiro, 2014), we look at the impact of exports to China on local employment

from 2007 to 2017. This period also contributes to fi lling the gap between the commonly