Child Labor: Theory of Foreign Trade and Investment Intervention

The principal result of this paper is that under endogenous international capital mobility inward FDI reduces the incidence of child labor if stimulated by a country’s trade policy of granting protection to the sector that employs child labor. Child labor persists, however, if there is exogenous inward FDI and it is small in magnitude; it is eradicated in equilibrium if this FDI is sufficiently large. If the supply of capital in the country is fixed, granting greater tariff protection or higher export subsidy to a sector that employs child labor reduces its incidence, and may eventually eliminate it. Since a country’s aggregate real income decreases as the import tariff increases, it may sometimes face the dilemma of having to choose between higher real GDP or fewer child workers as an entailment of its foreign trade policy. These results are obtained under standard assumptions about technology, and maximizing behavior on the part of both producers and families, with the latter maximizing a Kanger-Sen non-binary preference ranking relation subject to their budget constraints. (171 words)