We explore the link between trade liberalization and forced labor theoretically and empirically.
We provide a theoretical framework predicting that the net effect of trade on the use of forced labor depends on which sectors improve their relative terms of trade: (i) If forced-labor-intensive goods improve their relative terms of trade, then the use of cheap forced labor increases (forced labor demand channel); (ii) if free-labor-intensive goods improve their relative terms of trade, then the prevalence of forced labor decreases (free labor demand channel). Similarly, if openness to trade triggers anti-forced labor policies in the country (policy channel) or by trade partners (supply chains channel), then the prevalence of forced labor also decreases. These countervailing forces are consistent, on the one hand, with calls for import prohibitions on products made using forced labor and, on the other hand, with the hope that trade opportunities induce economic progress. Our empirical analysis provides causal evidence on these countervailing forces in a cross-country setting through an instrumental variable approach. We find that after accounting for the relation between trade and income and institutions, there is cross-country evidence for the forced labor demand channel: an increase in a country’s openness raises the use of forced labor. But we also show that the forced labor demand channel is only present in trade with non-OECD countries, and provide evidence suggesting that supply chain transparency measures of developed countries decrease the use of forced labor. Our theoretical and empirical insights make a significant contribution to global debates on globalisation, international trade, the UN’s Sustainable Development Goals (SDGS), ILO conventions and actions on forced labor, and domestic level legal developments designed to combat forced labor and modern slavery.