This question is related to the findings in the following paper:

McCaig, Brian and Nina Pavcnik. (2018) Export Markets and Labor Allocation in a Low-Income Country. American Economic Review, 108(7): 18991941.

An excerpt of the abstract is copied below:

We study the effects of a positive export shock on labor allocation between the informal, microenterprise sector and the formal firm sector in a low-income country. The United States-Vietnam Bilateral Trade Agreement led to large reductions in US tariffs on Vietnamese exports. We find that the share of manufacturing workers in Vietnam in the formal sector increased by 5 percentage points in response to the US tariff reductions. ... We estimate the gap in labor productivity within manufacturing across the informal and formal sectors. This gap and the aggregate labor productivity gain from the export-induced reallocation of workers across the two sectors are reduced when we account for worker heterogeneity, measurement error, and differences in labor intensity of production.

Assume that the United States is a large country and answer the following:

(a) Explain what most-favoured-nation (MFN) tariffs mean. Demonstrate the welfare effects of large reductions in US tariffs on Vietnamese exports in the United States. (max. 300 words; 10 points)

(b) Suppose the United States always maximises social welfare, without considering any political economy motives. What would explain that the United States had signed a bilateral trade agreement with Vietnam? (max. 300 words; 10 points)

(c) Panel B of Table 2 in McCaig and Pavcnik (2018) showed that the aggregate decline of employment in household businesses can be explained by both between-industries (48%) and within-industries (52%) margins. Would we expect this split with the Heckscher-Ohlin model? Why or why not? (max. 250 words; 8 points)

(d) McCaig and Pavcnik (2018) also found that aggregate productivity improvements in Vietnamese manufacturing sector can be attributed by the reallocation of workers towards more productive firms. How can we explain that? (max. 300 words; 10 points)

(e) The central message of the paper is that trade liberalisation in Vietnam shifts workers from the informal sector (household enterprises) to the former sector (manufacturing), and it leads to a labour productivity gain in the short-run. With this in mind, what do you think labour productivity would change in the long-run? (max. 350 words; 12 points)