International Migration and Trade

Abstract

This paper investigates the relationship between international trade flows and immigration/emigration flows. Earlier work appears to have followed two discrete lines of inquiry. One strand of the literature is firmly rooted in the economics of international trade, while another approach employs methods of labor economics. More recently, a few authors have considered immigration policy and reform in a median voter framework of public choice. Virtually all of this literature however, is largely inaccessible to the legal community, in part because of the mathematical techniques employed. In this paper, we attempt to synthesize some of the existing theoretical and empirical literature and to place it in a legal context.

The paper begins by observing that although, international trade flows have increased substantially over the preceding two decades, international migration flows have exhibited no such increase in spite of the secular fall in transport costs and information costs and despite increased wage differentials between rich and poor countries. This pattern is in sharp contrast to the pattern observed at the beginning of this century and during the 1960s in Europe when trade and migration flows both exhibited simultaneous sharp increases. The central question to be addresses by the paper is the extent to which trade flows may be substitutes for or complementary to flows of factors of production such as labor and capital. Furthermore, if a stable relationship is found to exist between trade and migration flows, then an immigration policy response say, to large uncontrolled flows of illegal labor, could well be fashioned in terms of trade policy. The standard result of relatively early vintage stems from work of Heckscher-Olin, Rybczynski, Samuelson-Stolper and Mundell. Essentially, with two inputs (factors of production), perfect competition and zero transportation costs, trade in goods can be shown to be fully substitutable with factor mobility (migration). The policy implications of the result are clear-- migration flows including illegal immigration can be stemmed through trade liberalization. When the theoretical framework is extended beyond the simple two-factor fully mobile factor context, the impact of trade liberalization on migration flows becomes ambiguous and depends upon specific parameter values. For example, it can be shown that in a Ricardian type framework where factor endowments across countries are identical but technologies vary, increased migration of labor can lead to increased capital-labor ratios and thereby, to increased trade. In other words, migration and trade flows act in a complementary fashion instead of being substitutes. Similarly, in a model where certain factors of production are specific to their uses (for example, land or non-moveable capital equipment), the impact of trade liberalization on the flows of internationally mobile factors such as labor, is ambiguous.

More recent work in international trade incorporates increasing returns to scale and monopolistic competition. When increasing returns to scale are present (as for example, in the information industry) increased trade leads to greater specialization in the sector characterized by increasing returns to scale, to higher wages and to larger migration flows. Again, trade liberalization and migration flows are complementary rather than being substitutes. The issue naturally arises as to which model or framework is suitable or applicable to say, trade/migration in the NAFTA region or within the EU. There may be reason to believe that extant labor market rigidities and monopolistic competition are more prevalent in the EU than in the US so that the modern increasing returns to scale models may be more relevant to trade and migration flows within the EU rather than the Americas.

The next part of the paper deals with normative issues. Given the existing trade regime, is it efficient (welfare enhancing) to liberalize or restrict international migration further? The results will depend in part, upon the welfare criterion adopted, i.e., host country welfare or global welfare, but also upon the model context. However, a surprisingly broad generalization (also noted recently by Chang) is that world welfare would generally be enhanced by liberalization of immigration restrictions in developed countries. If so, the question naturally arises as to why are inefficiently restrictive policies adopted. In the context of a median voter framework of public choice, it is possible to show that under certain plausible assumptions, the median voter may prefer a general ban on immigration, while at the same time supporting selective illegal immigration. The paper concludes with general discussion of the political economy of illegal immigration.

JEL Classification: F13, J61