migration and international trade
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Migration andInternational TradeThe US Experience since 1945
Roger White
Franklin & Marshall College, USA
Edward ElgarCheltenham, UK Northampton, MA, USA
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Roger White 2010
All rights reserved. No part o this publication may be reproduced, stored in aretrieval system or transmitted in any orm or by any means, electronic,mechanical or photocopying, recording, or otherwise without the priorpermission o the publisher.
Published byEdward Elgar Publishing Limited
The Lypiatts15 Lansdown RoadCheltenhamGlos GL50 2JAUK
Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060
USA
A catalogue record or this bookis available rom the British Library
Library o Congress Control Number: 2009940742
ISBN 978 1 84844 696 0
Printed and bound by MPG Books Group, UK
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iii
Contents
Acknowledgements vi
PART I WHAT IS THE IMMIGRANTTRADE LINK AND
WHY IT MATTERS
1 An overview o the immigranttrade relationship 31.1 Recent periods o international economic integration 4
1.2 Why the immigranttrade link matters 11
1.3 What we are doing in this book (and how we do it) 16
2 What are the channels through which immigrants afect trade? 20
2.1 Are migration and trade complements or substitutes? 21
2.2 How do immigrants afect trade ows? 29
2.3 What are the welare implications or the host country? 35
3 Lessons rom prior studies o the immigranttrade link 37
3.1 Identication o the immigranttrade relationship 373.2 Variation in the immigranttrade relationship across
product classications 46
3.3 The inuences o immigrant characteristics and
attributes 47
3.4 Why host country immigration policies matter 50
3.5 How home country characteristics afect the immigrant
trade relationship 53
3.6 Cultural diferences and the inuences o immigrants
on hosthome country trade 563.7 Estimated per-immigrant efects 57
PART II WHAT FACTORS MAY UNDERLIE THE US
IMMIGRANTTRADE LINK
4 A brie review o US immigration history 63
4.1 Wave I: 15651802 64
4.2 Wave II: 180368 66
4.3 Wave III: 18691917 68
4.4 Wave IV: 191868 70
4.5 Wave V: 1969 present 73
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iv Migration and International Trade
5 Primacy, recency and the US immigranttrade relationship 78
5.1 The demographic consequences o US immigration
policy 79
5.2 Appendix 5.A: Country listing 886 The importance o trade-acilitating inrastructure 89
6.1 What is trade-acilitating inrastructure? 90
6.2 Does the level and quality o inrastructure vary across
home country cohorts? 91
7 Cultural distance between the US and immigrants home
countries 102
7.1 Studies involving cultural distance, immigrants and
trade 103
7.2 Measuring UShome country cultural diferences 1057.3 Calculating UShome country cultural distances 110
PART III EXAMINING THE US IMMIGRANTTRADE
LINK
8 Empirical specication, variable construction and data sources 117
8.1 Baseline specication: the augmented gravity model 117
8.2 Variable construction and data sources 120
8.3 Descriptive statistics 1259 Verication o the immigranttrade link 137
9.1 The inuence o immigrants on UShome country trade 137
9.2 Immigrants characteristics and the immigrant
trade link 144
9.3 Immigrants and the efects o cultural distance 148
10 Variation in the immigranttrade link 154
10.1 Pre-1968 and post-1968 home country cohorts 154
10.2 Disaggregated trade data: trade-intensication and
trade-initiation 16210.3 Appendix 10.A: Core and related cultural goods
classications 172
10.4 Appendix 10.B: Country listing 174
PART IV IMPLICATIONS AND OPPORTUNITIES
11 Lessons or US immigration policy 177
11.1 Perceived vs. real benets/costs and the inuence o
risk-averse preerences 179
11.2 Revisiting the immigranttrade link hypotheses 183
11.3 Maximizing the net social benet o immigration 191
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Contents v
11.4 Identiying and engineering opportunities or welare-
enhancement 194
12 Summing-up: concluding thoughts and (yet) unanswered
questions 201
Reerences 207
Index 219
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vi
Acknowledgements
I am grateul to the Franklin & Marshall College Hackman Scholars
program and the John F. Kennedy Presidential Librarys Abba P. Schwartz
Research Fellowship program or their nancial support. A special note o
thanks to my requent co-author, Bedassa Tadesse, whose insight into the
immigranttrade relationship has beneted me immeasurably. Shamma
Alam and Fei Wang provided excellent research assistance.
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PART I
What is the immigranttrade link and why itmatters
Even though international economic integration is but one acet o a more
broadly dened globalization that also involves cultural and political inte-
gration, much o the anti-globalization backlash witnessed in recent years
has ocused on matters related to economics. The debate over the proper
pace o globalization and what limits or restrictions, i any, can or should
be imposed on the process has spread rom advanced post-industrial socie-
ties to the developing world. In essence, the debate has gone global.Those in avor o increased economic integration argue that a more open
world improves lives as new products and ideas become universally avail-
able and that the removal o trade and investment barriers spurs economic
and social development. Such development is said to prompt the emer-
gence o democratic institutions, leading adversaries to become allies and
people to become empowered. Opponents express concern over related
welare and distributional consequences, the implications or national
sovereignty, worries o cultural homogenization and the environmental
impact o economic integration. Unortunately, those on both sides o thedebate oten speak with certainty even though their positions requently
are based on incomplete inormation. Although the topic o globalization
is ar too vast to be adequately addressed here, this book does examine one
aspect o economic integration and, hence, o globalization: the inuence
that immigrants have on trade between their host and home countries.
Chapter 1 denes the immigranttrade link, discusses why it is import-
ant and presents a roadmap or the remainder o the book. Subsequent
chapters ofer an expansive treatment o the topic by surveying the related
literature, presenting the results o our empirical analysis, and oferingthoughts on the corresponding public policy implications.
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3
1. An overview o the immigranttraderelationship
The increased pace and scope o economic integration has contributed,
particularly within developed nations, to the emergence o immigration
and international trade as important domestic policy issues. A large body
o literature has emerged in recent years to detail the positive inuenceso immigrants on trade between their host and home countries. These
pro-trade inuences are thought to result rom immigrants knowledge
o host and home country customs and business practices, their language
abilities and understanding o inormal contracting structures, and their
connections to business and social networks that act to reduce trade-
related transaction costs. Immigrants are also thought to increase their
host countries imports rom their respective home countries i they arrive
with preerences or home country goods and nd that neither the desired
products nor reasonable substitutes are available.Immigrants may also exert indirect inuences on their host countrys
imports i their consumption exposes native-born residents and immigrants
rom other countries who reside in the host country to home country prod-
ucts. This may lead to spillover efects as these individuals also begin to
consume the home country products. I so, then the host countrys imports
rom the immigrants home countries will increase urther. Additionally,
immigrants remittances may enable individuals in the immigrants home
countries to consume at higher levels than would otherwise be possible.
I so, this potentially increases the host countrys exports to these home
countries. Likewise, i immigrants act to increase oreign direct investment
(FDI) between their home and host countries, subsequent corresponding
increases in hosthome country trade may also occur.
While the literature ofers assumed channels through which immigrants
exert pro-trade inuences, it largely ails to identiy an underlying basis or
the immigranttrade link or to indicate the public policy relevance. This
book serves to ll the corresponding gaps. By providing detailed coverage
o the immigranttrade relationship and ofering a quantitative treatment
o the US immigranttrade relationship, the existence o an immigrant
trade link is veried, actors that are likely to contribute to the presenceand magnitude o and variation in the link are explored, and the associated
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4 Migration and International Trade
public policy implications are considered and discussed. This augments
the existing understanding o the implications o economic integration
and, more generally, o the globalization process and, by doing so, pro-
vides important inormation that is relevant or domestic policy ormula-tion. Due to limited data availability the empirical analysis is restricted to
the period rom 1992 to 2006, but the general ocus is on the period since
the close o World War II as, during this time, US immigration and trade
policies underwent marked changes which acilitated increased integration
into the global economy/community.
1.1 RECENT PERIODS OF INTERNATIONAL
ECONOMIC INTEGRATION
The US immigranttrade link is perhaps best understood i considered
within the context o US and global economic integration. While many
view globalization as a recent phenomenon, there have been several
periods during which the processes that are generally associated with
globalization have been witnessed. The three most recent periods are
particularly relevant or the work undertaken here as each has involved
changes in US public policy regarding trade, oreign direct investment and
immigration.The rst period spans the years rom the end o the US Civil War until
the onset o World War I. During this time, international trade, FDI and
migration all increased signicantly. The value o global exports as a share
o world income doubled to 8 per cent with much o this growth preceded
by a large-scale international reallocation o actor inputs. Additionally,
nearly 10 per cent o the worlds population migrated internationally
during this period. This included an estimated 60 million individuals
arriving in the western hemisphere rom Europe. Other relatively land-
abundant nations, such as Argentina, Australia and New Zealand, alsorealized rapid population growth that was primarily due to immigration
rom European nations. At about the same time, a similar outward migra-
tion occurred rom the densely populated nations o China and India
to neighboring countries such as Myanmar, the Philippines, Sri Lanka,
Thailand, and Vietnam (World Bank, 2009b).
The international capital ows that preceded the large-scale migrations
o this period were quite impressive. Crats (2000) notes that estimated FDI
stocks as a share o gross global product more than doubled in just three
decades: rom 6.9 per cent in 1870 to 18.6 per cent in 1900. Aterwards,
this share leveled, yet in 1913 it remained equal to 17.5 per cent. The move-
ments o labor and capital led to changes in the levels and compositions
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An overview o the immigranttrade relationship 5
o countries outputs, which subsequently translated to growth in inter-
national trade. Also during this period o globalization, trade in primary
products (that is, commodities produced by extractive industries such as
agriculture, shing, orestry, mining and/or quarrying) roughly tripled,while trade in manuactured products more than doubled, with the major-
ity o this growth being realized ater 1895 (League o Nations, 1945).
The onset o World War I brought this period o economic integration
to a close, and an era o economic protectionism that led to increases in
import tarifs and the adoption o many non-tarif trade barriers coincided
with the wars conclusion. The erection o trade barriers led world eco-
nomic growth rst to slow and then to stagnate. Global exports as a share
o world income soon declined to the 4 per cent level observed in 1870
(World Bank, 2009b). Like many o its trading partners, the US economywithdrew behind a wall o protectionism. In 1917, the average US tarif on
dutiable imports was 38 per cent. By 1931, this value had increased to 55
per cent (Milanovic, 2002). These increases in import tarifs were largely
due to two pieces o legislation: the FordneyMcCumber Act o 1922 and
the HawleySmoot Act o 1930.
In an attempt to promote economic sel-su ciency, the Fordney
McCumber Act imposed tarifs to restrict imports in hopes o expand-
ing domestic rms production and their market shares. Passage o the
HawleySmoot Act urther limited imports. Once again, the justicationwas that higher tarifs on imported goods would discourage domestic
consumers rom importing oreign goods and, with ewer imports enter-
ing the US economy, there would be an increase in domestic production.
The HawleySmoot Act, however, was not passed to promote economic
sel-su ciency so much as to increase domestic employment by export-
ing US unemployment to its principal trading partners. A beggar-thy-
neighbor policy, the HawleySmoot Act raised tarifs or more than
20 000 imported goods to record levels. In response to both measures,
the major trading partners o the US retaliated by imposing tarifs on USexports. Not surprisingly, the volume o US trade (that is, the combined
value o US imports and exports as a share o gross domestic product
(GDP)) decreased rom roughly 12 per cent at the beginning o World War
I to 8 per cent at the outset o World War II (Baldwin and Martin, 1999).
Coinciding with this decrease in trade intensity, FDI stocks as a share o
gross global product, which were equal to 17.5 per cent in 1913, declined
sharply to 8.4 per cent by 1930 (Crats, 2000).
Pre-dating these legislative attempts to restrict international trade,
a movement towards inuencing the demographic composition o US
immigrant inows began in the latter decades o the nineteenth century.
This involved targeted reductions or, in certain instances, the cessation o
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6 Migration and International Trade
non-European immigration to the US. The experience o the Chinese is
illustrative. A large inow o Asians, particularly Chinese, to the western
US began shortly beore the Caliornia Gold Rush. In total, an estimated
300 000 Chinese immigrants, predominantly male, arrived between 1843and 1880. Initially, as there was a need or low-wage labor, the Chinese
immigrants were accepted, although begrudgingly in some instances. In
the 1850s, however, as the Gold Rush came to a close, eforts were under-
taken to limit the inow o Asians. The State o Caliornia passed the
Foreign Miners Tax in 1852 which, although usually enorced or immi-
grants rom China and Mexico, was reportedly oten waived or European
immigrants. Poll taxes and laundry license ees were also imposed on
Chinese immigrants and, to urther encumber Chinese immigrants, schools
were segregated. Anti-Chinese sentiment was exacerbated by the onset othe Long Depression (18739), culminating in 1882 with the passage
o the Chinese Exclusion Act. Initially, the Act imposed a ten-year ban
on Chinese immigration and banned inter-racial marriage in order to
restrict Chinese immigrants rom becoming US citizens. The Geary Act
(1892) extended the ban or an additional ten years. The Extension o
the Exclusion Act (1902) extended the ban once more, and passage o the
Exclusion Act o 1904 nally made the ban permanent.
The Chinese Exclusion Act was not the rst overt anti-immigrant
statute enacted by the US government. That distinction belongs to theNaturalization Act o 1790 which, although it did not restrict immigra-
tion per se, discouraged non-European migration by limiting naturaliz-
ation to only ree white persons with good moral character. The Chinese
Exclusion Act, however, marked the beginning o a decades-long episode
during which US immigration policy was purposeully structured, by and
large, to aford sustained entry preerence to immigrants rom European
nations.
Even though legislative eforts banned or limited immigrant inows rom
certain countries or regions, the US immigration rate (per 1000 residents)increased rom 6.4 in 1870 to 10.4 in 1910 (Crats, 2000). This enabled the
oreign-born share o the US population to increase slightly rom 14.4
per cent to 14.7 per cent during the 18701910 period (Briggs, 2003). The
Immigration Act o 1917 broadened the Chinese Exclusion Act to exclude
immigrants rom most o Asia. Specically, the Act required immigrants
to pass a literacy test and created the Asiatic Barred Zone. Passed against
President Wilsons veto, the Act o 1917 excluded immigration rom
Aghanistan, Arabia, the East Indies, India, Indochina, Polynesia, and
the portion o Russia that lies in Asia. The combined efect o increased
migration and the imposition o limits on Asian migration was that the US
population continued to be predominantly o European descent.
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An overview o the immigranttrade relationship 7
The Johnson Quota Act o 1921 (the Emergency Quota Act) and the
JohnsonReed Act o 1924 (the Immigration Act o 1924) urther codi-
ed this preerence or European immigrants. The Emergency Quota Act
imposed a system under which total annual immigrant inows werecapped at 3 per cent o the 1910 US oreign-born population, and country-
specic quotas were implemented such that the composition o subse-
quent immigrant inows mirrored the oreign-born population o the
US in 1910. The Immigration Act o 1924 is also oten reerred to as the
Japanese Exclusion Act. The Act, which went into efect in 1929, banned
Japanese immigration to the US and amended the Emergency Quota Act
such that the total annual inow was adjusted downward to equal only 2
per cent o the 1890 US oreign-born population. Further, country-specic
immigrant entry quotas were determined based on the demographic com-position o the US oreign-born population in 1890. Due in part to these
stringent restrictions, the US immigration rate (again, per 1000 residents)
declined rom 10.4 in 1910 to 3.5 in 1930 (Crats, 2000) and, by 1940, the
oreign-born population as a share o the US population had decreased to
only 8.8 per cent (Briggs, 2003).
Passage o the Magnuson Act in 1943 (the Chinese Exclusion Repeal
Act), the Displaced Persons Acts o 1948, 1950 and 1951, and the
McCarrenWalter Act o 1952 (which changed the laws governing the natu-
ralization o immigrants and removed the ban on Japanese immigration)marked the beginnings o a shit in US immigration policy that would
culminate with the HartCellar Act o 1965. This Act is more commonly
known as the Immigration and Nationality Act o 1965 or, more simply,
as the Immigration Act o 1965. For the purposes o understanding the
US immigranttrade link, it is important to note that although there were
signicant changes in the source regions/countries o immigrant arrivals
ollowing the July 1968 implementation o the Act o 1965, the policy
change was made possible by the legislative changes that began ollowing
the end o World War II.The changes in immigration policy that occurred in the years ater
World War II coincided with shits in US trade policy and the creation o
several international institutions that were charged with the responsibility
o ostering greater economic interaction between nations. The Reciprocal
Tarif Act o 1934 marked the beginning o a movement towards increased
trade openness by giving the Executive branch o the US government the
authority to negotiate bilateral tarif reductions, essentially reversing the
efects o the FordneyMcCumber Act and the HawleySmoot Act. Even
so, the dismantling o trade barriers was hindered by the prolonged dura-
tion o the Great Depression, World War II, and general protectionist
sentiment. The volume o US trade decreased rom 9.2 per cent o GDP
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8 Migration and International Trade
in 1929 to 6.9 per cent in 1939 and was only 4.8 per cent in 1945 (FRBSL,
2009a; 2009b and 2009c). In July 1944, however, representatives o the
44 Allied nations met at the United Nations Monetary and Financial
Conerence (more commonly known as the Bretton Woods Conerence)to discuss the post-war international nancial architecture. The results
were the establishment o the International Monetary Fund (IMF), the
International Bank or Reconstruction and Development (IBRD), which
is now part o the World Bank Group, and the General Agreement on
Tarifs and Trade (GATT), which remained in operation until it was
replaced, in 1995, by the World Trade Organization (WTO).
The establishment o the IMF, the IBRD and the GATT, coupled with
the relaxation o US immigration policy, generally corresponds with the
start o a second period o globalization that emerged at the close o WorldWar II and lasted until roughly 1980. During these decades, the developed
economies o Europe, North America and Japan restored trade relations
through a series o multilateral liberalizations. Technological advances
continued to result in lower transport costs, and the noted multilateral
negotiations led to reductions in tarifs and non-tarif barriers. This led
to increases in the volume o US trade; however, the sum o exports and
imports did not reach the 1929 level o 9.2 per cent o GDP until 1969, and
in 1980 the US volume o trade was only equal to 12.3 per cent o GDP
(FRBSL, 2009a; 2009b and 2009c).While other developed countries, such as Australia and New Zealand,
shared in the post-World War II trading boom, much o the developing
world chose to maintain high barriers on many imports. Oten, these bar-
riers existed or the purpose o generating government revenue; however,
in a number o instances, the governments o developing nations sought
to limit imports in order to promote domestic production o comparable
goods. The result o these import substitution and/or inant industry
policies was that, while trade between developed economies ourished,
developing countries continued to ace substantial barriers to trade inmost products other than primary commodities. The restrictions, main-
tained on developing countries exports by developed countries and on
developed countries exports by most developing countries, led developing
nations to trade, on average, less intensively than developed countries and
less in general than would be expected in the absence o such barriers.
The Immigration Act o 1965 replaced the quota system that had rst
been implemented by the Emergency Quota Act o 1921, and that had
been later modied by the McCarrenWalter Act o 1952, with a system
that granted priority to immigrants based on three principles: amily
reunication, lling vacancies in the labor market, and the entrance o
reugees and asylum-seekers. The policy change soon produced a shit in
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An overview o the immigranttrade relationship 9
the source countries/regions o US immigrant inows. Ater the Act was
implemented in July 1968, the principal departure regions o immigrant
arrivals quickly changed rom Europe, Canada and, to a much lesser
extent, Australia and New Zealand, to Asia, the Caribbean Basin, Mexicoand Central America. This led, in subsequent decades, to a decrease in the
proportion o the US immigrant population that was born in Europe and
increases in the shares that were born in Latin America (that is, Mexico
and Central America) and the Caribbean Basin and in Asia. More speci-
cally, in 1960, 74.5 per cent o all US immigrants had been born in Europe;
however, by 2000, that gure had declined to 15.8 per cent. Similarly,
between 1960 and 2000, the proportion o the US immigrant population
that had been born in Asia increased rom 5 per cent to 26.4 per cent, while
the proportion o the population born in Latin America increased rom9.3 per cent to 51.7 per cent (Briggs, 2003; US Census, 2003).
The current period o globalization began roughly in 1980 when a
number o then-developing countries (or example, Bangladesh, China,
India, Indonesia, Mexico, Morocco, the Philippines, Sri Lanka and
Turkey) began to enact policies that would increase their participation
in global markets. As this occurred, the US volume o trade more than
doubled rom its 1980 value o 12.3 per cent to 29.3 per cent in 2008
(FRBSL, 2009a; 2009b and 2009c). This 17 percentage point increase in
the intensity o US trade is particularly striking when one considers thatthe value increased by only 3.1 percentage points during the more than
ve decades rom 1929 until 1980. Inclusion o a large portion o the
developing world made the globalization process much more global in
scope. As with prior periods, transport costs have decreased in part due
to technological advances but also because greater trade in services has
decreased the average weight o traded products. This reduction in trade
weight is to some degree a distinct characteristic o the current period
(IOM, 2008).
As mentioned, in conjunction with the developing worlds generalopening to the global economy, the US has realized large and sustained
increases in the number o immigrant arrivals rom many develop-
ing countries. The most notable example is that o Mexico. The 1970
Census counted approximately 760 000 Mexican-born individuals in the
US. Three decades later, in 2000, that number had increased more than
tenold, as the Census counted 7.8 million Mexican-born US residents.
While undocumented immigrants may well participate in the US census, it
is likely that some (and perhaps many) would seek to avoid inclusion. O
the estimated 8.5 million unauthorized immigrants in the US in 2000, 4.68
million were thought to be rom Mexico (US DHS, 2007a). This places the
Mexican-born population o the US in 2000 at upwards o 13.2 million
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10 Migration and International Trade
persons, a proportional increase rom the 1970 Census count o more than
1600 per cent.
In total, the 1970 Census counted 9.6 million oreign-born residents in
the US. The 2000 Census estimated the nations oreign-born populationat slightly more than 31 million persons. Although Mexico accounts or
a very large portion o the increase in the US oreign-born population,
it is hardly the lone contributor. In 1970, or example, the US was home
to ewer than 200 000 individuals rom each o China, the Dominican
Republic, El Salvador, India, the Philippines, South Korea and Vietnam;
however, in 2000, the US was home to 765 000 immigrants rom El
Salvador and 692 000 immigrants rom the Dominican Republic. Even
larger increases were observed in the numbers o immigrants rom several
Asian nations: China (1.4 million immigrants in the US in 2000), thePhilippines (1.2 million), India (1 million), Vietnam (863 000) and South
Korea (701 000).
As the US oreign-born population has increased, so too have FDI ow,
and trade ows; ofering evidence o the extent to which economic integra-
tion has developed in recent decades. In 2007, global FDI inows reached
$1.83 trillion, a value that was equal to slightly more than 3.3 per cent o
gross global product. This gure dwared the $58 billion o global FDI
ows (0.5 per cent o gross global product) witnessed a mere quarter o a
century earlier (UNCTAD, 2008). During this same period, global exportso goods and non-actor services increased rom 19.8 per cent to 31.4 per
cent o world income (UNCTAD, 2008). The US experienced increases in
FDI ows and trade ows largely comparable to those witnessed globally.
The sum o US FDI inows and outows increased rom 0.5 per cent to
4.1 per cent o GDP (US BEA, 2008a and 2008b), while the US trade
volume more than doubled. Just as the US experience with respect to FDI
ows and trade ows largely mirrored corresponding global changes,
between 1980 and 2006 the US oreign-born population nearly tripled,
increasing rom 14.1 million persons to 37.5 million persons (US Census,2008 and 2006), while the estimated number o immigrants worldwide
doubled during the period to approximately 200 million persons (UN,
2005; IOM, 2008).
The depth o global economic integration, as measured by trade- and
FDI-to-GDP ratios and by increases in international migration, has been
echoed by increased interconnectedness among individuals and greater
international engagement by national governments. In recent decades, sus-
tained and signicant increases have been realized in international tourism
and overseas telephone tra c. More recently, Internet access/usage has
become more common although this is, admittedly, largely driven by tech-
nological innovation and general economic development. Nonetheless,
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An overview o the immigranttrade relationship 11
nearly all national governments have expressed a desire or greater inter-
connectedness with other nations and have acted to increase the degrees to
which they are engaged with other governments and international organ-
izations. Even so, the absolute extent to which economies are integrated,that individuals are connected, and to which governments are engaged to
their respective international counterparts remains somewhat limited as
compared to the possibilities. This suggests that the process o economic
integration as a component o a larger globalization will continue, and will
remain an important topic o public and political debate.
1.2 WHY THE IMMIGRANTTRADE LINK
MATTERS
While it is reasonable to expect periodic ebb and ow in the integration o
the US economy into the global economy, the immense benets that eco-
nomic integration has conerred and the potential gains it promises ensure
that the process will not be abandoned. To be sure, there are negatives
that accompany this process; however, the net efect on social welare has
largely been viewed as positive. The corresponding gains, however, oten
appear to be less than ully acknowledged by the public or by elected o c-
ials who are charged with the responsibility o ormulating public policy.Frequently, it appears that US immigration policy and, to a considerably
lesser extent, trade policy are structured to minimize associated costs
rather than to maximize the corresponding net social benets. In short,
the public and political debates surrounding these policies are requently
ramed such that the discussion becomes how many immigrants (or
imports) can we aford to let enter the country? rather than what policy
maximizes the net social benets o immigration (or trade)? By not ully
considering the benecial aspects o immigrants or o trade, policymakers
are restricted to ormulate and implement sub-optimal public policies.The views held by the public are important as they may inuence
policymakers either through the electoral process or via a ormal lobbying
process. To provide a deeper understanding o public opinion on issues
relating to globalization, Scheve and Slaughter (2001) review responses to
a large number o US public opinion polls that were conducted between
1988 and 2000. Ofering important and detailed insights, the authors
conclude that survey respondents generally acknowledge the benets con-
erred by international trade such as lower product prices, greater product
variety, technology transers and incentives or domestic producers to
innovate. However, a majority o respondents also worry that increased
trade liberalization contributes to job loss and places downward pressure
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12 Migration and International Trade
on wages or American workers. A telling nding is that, when asked ques-
tions that ofered a choice between the benets and costs o international
trade, respondents generally chose the answer that emphasized costs. One
such example is rom an October 1999 Program on International PolicyAttitudes survey. Respondents were asked which o the ollowing two
statements best reects their views:
Statement A: Foreign trade has been good or the US economy, because
demand or US products abroad has resulted in economic growth and jobs
or Americans here at home.
Statement B: Foreign trade has been bad or the US economy, because cheap
imports rom abroad have hurt wages and cost jobs here at home.
Thirty-two per cent o respondents chose Statement A, while 58 per cent
chose Statement B.1 While this is only one example, it is largely emblem-
atic o the responses to similar survey questions during the period.
More recent opinion polls ofer similar evidence:2
Two NBC News/Wall Street Journal polls, conducted in December
2007 and in March 2008, ound 58 per cent o respondents believed
increased globalization had been bad or the American economybecause it has subjected American companies and employees to
unair competition and cheap labor. Only 25 per cent and 28 per
cent o respondents, respectively, believed that increased global-
ization was benecial because it has opened up new markets or
American products and resulted in more jobs.
A separate NBC News/Wall Street Journal poll, conducted in March
2007, ound that 48 per cent o respondents believe the US is being
harmed by the global economy, while 25 per cent believe the US
is beneting rom the global economy. Likewise, two Los AngelesTimes/Bloomberg polls (November 2007 and May 2008) ound that
44 per cent and 50 per cent, respectively, o respondents believed
that ree trade has hurt the US economy, while only 26 per cent and
27 per cent o respondents, respectively, were o the opinion that ree
trade has been benecial or the economy.
An April 2006 USA Today/Gallup poll ound that 65 per cent o
respondents believed that trade mostly hurts American workers
while only 30 per cent believe it mostly helps American workers.
An interesting ollow-up question asked whether or not American
companies were mostly helped or hurt by increased trade: 50 per
cent o the respondents believed that trade mostly hurts American
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An overview o the immigranttrade relationship 13
rms and 44 per cent o those surveyed reported believing that trade
mostly helps.
Indicative o both the cleavage in public opinion regarding trade
and the extent to which the public is uncomortable with the poten-tial efects o trade, eight Gallup Poll surveys conducted between
2001 and 2009 asked the question: What do you think oreign trade
means or America? Do you see oreign trade more as an opportu-
nity or economic growth through increased US exports or a threat
to the economy rom oreign imports?
A large proportion o respondents, slightly less than 45 per cent,
on average, considered trade to be a threat, while slightly more than
46 per cent o respondents considered trade to be an opportunity or
economic growth. This near-even split in public opinion was persist-ent across the eight polls, as the share o respondents who believed
trade to be a threat ranged rom 37 per cent to 52 per cent, while the
share who believed trade to be an opportunity or growth ranged
rom 41 per cent to 52 per cent.
Members o the American public who avor maintaining current immi-
grant inow levels or who advocate a more liberal immigration policy
include the business lobby, which is comprised o those who hope to
gain access to immigrant labor. In recent years, union leaders have alsoexpressed support or expanded legal migration and or amnesty or illegal
immigrants. This has been viewed as an attempt to increase union presence/
power through expanded union membership. Unlike their leaders, union
members generally oppose a more liberal immigration policy and preer
reducing current inow levels. Environmentalists all on both sides o the
issue. Those avoring increased immigration argue that by having immi-
grants in the US, where environmental protection may be more stringent
as compared to their home countries, less strain is placed on the environ-
ment worldwide. Environmentalists opposed to a more lax immigrationpolicy and/or that preer reducing current inow levels contend that having
the immigrants in the US places an undue strain on local ecosystems. In
general, opposition also includes worries that immigration leads to an
expansion o the welare state, dilutes American culture and may even pose
a threat to national security (Daniels, 2003; Tichenor, 2002). A nal basis
or opposition is the argument that immigrants adversely afect public
nances and, in doing so, represent a net tax burden to the native-born
(Borjas and Hilton, 1996; Borjas, 1999; Fix and Passel, 2002; Zimmerman
and Tumlin, 1999; Smith and Edmonston, 1997). In short, the issue is divi-
sive and there is no shortage o competing perspectives or opinions.
Since the US economy usually creates more jobs than can be lled by
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14 Migration and International Trade
native-born workers, one benet o immigration is the increase in aggre-
gate output that results when immigrants ll vacancies in the domestic
labor market. For example, new immigrants accounted or more than hal
o the employment growth witnessed during the 1990s (Sum et al., 2002)and this certainly contributed to overall economic growth. Similarly,
since American colleges and universities commonly graduate too ew
native-born science and engineering students relative to the growth in
labor demand or workers in possession o such skills, domestic rms gain
in terms o their competitiveness by employing high-skilled immigrant
workers. Immigrants are also more likely than members o the native-
born population to be sel-employed or business owners (Batalova and
Dixon, 2005). Thus, it is likely that immigrants also create employment
opportunities. In addition to labor market-related benets, immigrantsadd cultural diversity to the US population, and immigration is an impor-
tant aspect o US oreign policy in the sense that immigrants, through
their interactions with amily, riends and colleagues in their home
countries, convey inormation regarding the values and culture o the
US. In spite o these benets, poll respondents requently express worry
regarding immigrants labor market efects. In act, the results o several
polls indicate the public preers either holding constant the number o
immigrants admitted to the US each year or allowing ewer immigrants to
enter.
A series o National Election Studies surveys, conducted in 1992,
1994 and 1996, asked respondents: Do you think the number o
immigrants rom oreign countries who are permitted to come to the
US to live should be increased a little, increased a lot, decreased a
little, decreased a lot, or let the same as it is now?
In 1992, a plurality o respondents (46.9 per cent) answered that
they would preer a decrease (either by a little or a lot) in the number
o immigrant arrivals. This gure increased to majorities in 1994 and1996 as 62.9 per cent and 51 per cent, respectively, avored decreas-
ing the number o immigrants admitted. In each o the three surveys,
ewer than one in ten respondents expressed a preerence or increas-
ing the number o immigrant arrivals, with the remaining responses
in avor o holding inow levels constant.
A cursory review o more recent public opinion polls provides equally
interesting responses.
A series o Gallup polls (conducted each June rom 2002 to 2008,
with the exception o 2004) posed the ollowing question: On the
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An overview o the immigranttrade relationship 15
whole, do you think immigration is a good thing or a bad thing or
this country today?
In each poll, the majority o respondents (ranging rom 52 per
cent in 2002 to 67 per cent in 2006) were o the opinion that immigra-tion was a good thing or the country. Further, other than the 2002
poll, when the gap between the shares o respondents answering
good or bad was 10 per cent, the margin o good over bad was
not less than 27 per cent. While this would suggest that a majority
o the public holds a avorable opinion o immigrants, the results o
ve NBC News/Wall Street Journalpolls, conducted between April
2006 and December 2007, asked respondents: Would you say that
immigration helps the United States more than it hurts it, or immi-
gration hurts the United States more than it helps it?The responses show no clear overall opinion, as the share o
respondents answering that immigration helps more ranged rom
39 per cent to 46 per cent, and the share o respondents answering
that immigration hurts more ranged rom 42 per cent to 52 per
cent.
Two NBC News/ Wall Street Journal polls, conducted in March
2005 and December 2007, respectively, ound that 46 per cent and
40 per cent o respondents viewed immigration as a benet because
immigrant workers ulll jobs in America that citizens either do notwant or cannot do, while 45 per cent and 43 per cent viewed immi-
gration as a threat because immigrant workers take jobs that would
otherwise be ullled by American citizens.
Asked the question In your view, should immigration be kept at
its present level, increased or decreased?, respondents to a dozen
Gallup Polls that were conducted between March 2001 and June
2008 consistently reported preerences or either holding migration
at its current level or decreasing the number o immigrant arrivals.
On average, only 14 per cent o respondents avored allowing moreimmigrants to enter each year; however, more than 46 per cent
avored decreasing the number o arrivals, and slightly more than
36 per cent avored holding the number o arrivals constant. The
publics views on this topic were quite stable over time. The share o
respondents who avored increased immigration ranged rom 8 per
cent to 18 per cent, while the share who avored decreasing immigra-
tion ranged rom 39 per cent to 58 per cent.
Scheve and Slaughter (2001) conclude that the opinions o the American
public regarding these acets o globalization are linked to uncertainty,
characterized by a discernible level o risk aversion, and marked by an
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16 Migration and International Trade
overall lack o inormation pertaining to the issues at hand. Further, the
authors argue that the anti-globalization sentiment indicated by responses
to public opinion polls reveals skepticism regarding the benets o global-
ization and, in particular, worries about the domestic labor market conse-quences o increased economic integration. As the results o more recent
opinion polls are aligned with the results o earlier polls that were exam-
ined by Scheve and Slaughter (2001), it appears that US public opinion on
these topics has not undamentally changed in recent years.
It may appear contradictory or the public both to recognize the benets
associated with international trade and immigration while also ofering
tepid support or these orms o integration. These views, however, are
entirely reasonable i we consider that the American public may be risk-
averse with respect to migration and trade. This would lead individualswho are aware that they will probably gain rom economic integration to
oppose integration and be willing to orgo associated benets because they
believe that their opposition may reduce the likelihood they will experience
an adverse outcome. Generally speaking, such risk aversion is rooted in a
desire to avoid losses. This means that individuals are willing to pay, in
the orm o orgone benets, to reduce the likelihood that they will sufer
a loss. In such a scenario, the tendency to strongly preer avoiding losses
provides an explanation or observed public opinion relating to the topics
o immigration and trade. In Chapter 11 we discuss risk-averse preerencesor immigration as they have implications or public policy ormulation.
1.3 WHAT WE ARE DOING IN THIS BOOK (ANDHOW WE DO IT)
The tensions reected in the polling data appear to signal uncertainty,
seemingly attributable to limited or incomplete inormation, regarding
the expected outcomes o greater integration o the US economy intothe global economy. With respect to both trade and immigration, there
appears to be a considerable lack o inormation among the public in
terms o the specics o the issues. For example, it is quite likely that
the perceived risk o experiencing an adverse labor market outcome is in
excess o the actual risk and/or that the extent o benets to be received is
understated when individuals ormulate their opinions regarding immigra-
tion and trade. The intent o this work is, in part, to coner inormation
that results in a better-inormed public, more e cient public policy or-
mulation and, hence, a greater likelihood that the potential gains o global
economic integration will be garnered. Creation o a US immigration
policy that coners the greatest benets to the largest number o citizens
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An overview o the immigranttrade relationship 17
while minimizing the associated costs requires as accurate an accounting
o the related benets and costs, both real and perceived, as is possible.
The immigranttrade relationship is examined in detail to conrm and
explore this source o benets. In doing so, this work contributes to abetter understanding o how the immigranttrade link operates which, in
turn, provides or a deeper and more precise understanding o the global-
ization process.
This book contains our parts. We begin by providing an overview o
the immigranttrade relationship and the general theoretical intuition/
ramework upon which the examination o the US immigranttrade link
is based. The rst part also contains a review o the relevant literature.
From this, a series o testable hypotheses regarding the immigranttrade
relationship is generated. The second part discusses the underlying actorsthat are thought to afect the operability o the US immigranttrade link.
The third part presents the data, the empirical strategy/ramework and a
discussion o the corresponding results as they relate to the hypotheses
presented in the rst part. Finally, the book concludes with a discussion
o the associated policy implications, nal thoughts and possible avenues
or uture research.
The remainder o this introductory part begins, in Chapter 2, by consid-
ering whether the theoretical relationship between immigrants and trade
is one o complements or o substitutes. Factor-endowment models otrade (that is, the HeckscherOhlin model and the Specic-Factors model)
generally hold that migration and trade are substitutes; however, under
certain conditions, actor-endowment models predict a complementary
relationship. Similarly, models o trade based on New Trade Theory treat
migration and trade as potentially complementary activities. As a comple-
mentary relationship between migration and trade is agnostic in terms o
the direction o causality, the chapter elaborates on the channels via which
immigrants are thought to inuence hosthome country trade. This is ol-
lowed in Chapter 3 by a review o the relevant literature. The expectationsgarnered rom the conclusions o prior studies provide testable hypotheses
that are addressed as part o our empirical analysis.
Chapters 4 to 7 ocus on possible actors that may underlie or explain
the US immigranttrade relationship. Quotation marks are used in the
preceding sentence because it is the conditions that may prove conducive
or immigrants to exert pro-trade inuences that are explored rather than
the immigranttrade relationship necessarily being explained in any strict
sense o the word. More specically, Chapter 4 provides an overview o
US immigration history, emphasizing the shit in US immigration policy
that began during World War II and which culminated with passage
o the Immigration and Nationality Act o 1965. As noted, in the years
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18 Migration and International Trade
ater World War II, European immigration to the US slowed consider-
ably. This decline occurred in conjunction with an increase in the ows o
immigrants rom Asia, Latin America and the Caribbean Basin. In act,
immigrant inows rom these latter regions accelerated su ciently thatthey emerged as the primary sources or recent immigrant inows. This
history is important as it provides a basis or variation in the immigrant
trade relationship across immigrants home countries.
The concepts o primacy efects and recency efects are introduced in
Chapter 5. Compared to what may be described as more traditional source
countries o US immigrant inows, the home countries o recent arrivals
are typically lacking in terms o the presence and quality o requisite trade-
acilitating inrastructure. Chapter 6 discusses how immigrants rom rela-
tively inrastructure-poor countries potentially ace greater opportunitiesto inuence trade relative to immigrants rom countries that tend to have
more or better inrastructure. Chapter 7 introduces a measure o the cul-
tural diferences between the US and each o its trading partners. Greater
cultural diferences are thought to coincide with variation in preerences
across native-born and immigrant populations. Such diferences are also
thought to correspond with product- and market-related inormation
asymmetries and with UShome country institutional dissimilarity. As
a result, cultural diferences may afect trade in a number o ways. For
example, the ndings o several studies suggest that cultural distance inhib-its trade by increasing related transaction costs. Immigrants have been
ound to ofset, at least in part, this trade-inhibiting inuence; however,
similar to variation in preerences, variation in UShome country cultural
and/or institutional (dis)similarity is likely to generate diferences in immi-
grants opportunities, and hence their abilities, to afect trade.
Chapters 8 to 10 present our empirical examination. Chapter 8 presents
the data and econometric specications. Chapter 9 veries the pro-trade
efect o immigrants and examines variation in the US immigranttrade
link across a number o immigrant characteristics and in relation toUShome country cultural distance. Chapter 10 considers the extent to
which the link is explained by variables controlling or what are termed
primacy and recency efects and how these efects relate to UShome
country cultural distance. We also explore the efects o immigrants on
disaggregated measures o trade to gain urther insights into the trade-
intensication efects o immigrants as well as discerning their trade-
initiation efects.
Finally, Chapter 11 discusses asymmetric inormation and risk-averse
preerences as explanations or observed public opinion on the topics
o migration and trade. It also summarizes the ndings o the analy-
sis presented in Chapters 8 to 10 and considers the implications o the
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An overview o the immigranttrade relationship 19
immigranttrade link or US immigration policy. In Chapter 12, we
conclude by revisiting the central theme o understanding the immigrant
trade relationship and its relation to the broader topic o globalization,
summarizing our ndings, discussing the corresponding policy implica-tions and suggesting possible extensions to the literature.
NOTES
1. Due to additional responses being ofered by interviewers or other responses oferedvoluntarily by respondents, poll numbers generally do not sum to 100 per cent. Forexample, or this poll, the remaining respondents answered either Some o both (6 percent) or Unsure (4 per cent).
2. Unless noted as being rom Scheve and Slaughter (2001), inormation related to pollsconducted since 2000 are rom Polling Report (2009a and 2009b).
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20
2. What are the channels throughwhich immigrants afect trade?
There are several channels through which immigrants are thought to afect
trade between their host and home countries. The direct channels include
a preerence efect and an inormation bridge efect. Greenaway et al.
(2008) suggest that this latter efect consists o separate cultural bridgeand enorcement bridge efects. First, due to their preerences or home
country products, immigrants potentially increase their host countrys
imports rom their home country. Second, immigrants may have the
ability to act in various capacities as de acto trade intermediaries that
resolve inormation asymmetries which contribute to higher trade-related
transaction costs and, hence, that hinder trade. I so, then both the host
countrys imports rom and exports to the immigrants home countries
would potentially increase. Likewise, immigrants may be connected to
business and/or social networks in their host and home countries that aidin the matching o buyers and sellers and in ensuring the enorcement o
inormal contracts.
Indirect efects include the possibility that immigrants consumption o
home country goods exposes other host country residents to such prod-
ucts. Thus, there is the potential that these individuals preerences will
be altered such that they too demand home country products. This, o
course, would act to urther increase the host countrys imports rom the
immigrants home countries. Additionally, immigrants oten send remit-
tances to individuals in their home countries and may also act to increase
hosthome country FDI ows. I remittances are allocated towards
consumption, then the exports o the host country may increase as a
result. Similarly, greater FDI ows may lead to subsequent increases in
the host countrys exports to and/or imports rom the immigrants home
countries.
Beore entering into a more detailed discussion o these channels, we
provide a cursory overview o trade theory as it relates to the question o
whether migration and trade are viewed as complements or substitutes.
Addressing this oundational question buttresses our analysis by provid-
ing a theoretical expectation or a positive immigranttrade link.
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The channels through which immigrants afect trade 21
2.1 ARE MIGRATION AND TRADECOMPLEMENTS OR SUBSTITUTES?
In recent years, a large body o literature has emerged that rmly estab-lishes a positive statistical relationship between migration and hosthome
country trade ows. Whether theory predicts a complementary relation-
ship or whether the two are considered likely substitutes depends on the
model o trade considered. Under standard assumptions, the Heckscher
Ohlin (H-O) model and its short-run variant, the Specic-Factors (SF)
model, suggest that migration and trade are substitutes. These actor
endowment-based models predict that trade will lead to the equalization
o product prices across trading partners and, under the assumption o
competitive actor markets, result in an equalization o actor prices. Withrespect to labor, the corresponding decrease in wage and income difer-
entials across trading partners reduces the incentive to migrate. In other
words, in an H-O world trade substitutes or migration in the sense that
an increase in the ormer is expected to decrease the latter. However, as we
examine the assumptions that underlie the standard H-O and SF models,
the appropriateness o these models in terms o evaluating the expected
relationship between migration and trade becomes questionable.
The most basic version o the H-O model employs a 2 2 2 rame-
work. That is, there are two countries, which can be reerred to, or sim-plicity, as home and oreign. Each country produces two goods (which we
will call Xand Y) using two actor inputs (labor and capital, denoted by
L and K, respectively). The model assumes diferences in the endowments
oL and Kacross the two countries. In this regard, the H-O ramework
departs rom the standard Ricardian model o comparative advantage
which posits that diferences in production technologies across the home
and oreign countries determine comparative advantages and the pattern
o trade. The Ricardian ramework illustrates that Pareto improvements
can result rom specialization and trade i undertaken in accordance withthe Law o Comparative Advantage. The H-O model ofers diferences
in actor endowments as an explanation or the existence o comparative
advantage while the Ricardian model, by assuming diferences in pro-
ductive technologies but not explaining the reason or these diferences,
assumes the basis or comparative advantage. This should not be taken
as a critique o the Ricardian ramework. Ricardos aim was to illustrate
the potential gains rom specialization and trade rather than to explain the
underlying basis or the existence o the potential gains.
The H-O model assumes that rms will act to maximize their prots
while consumers will act to maximize their utilities. Additionally, the
home and oreign countries are assumed to have identical production
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22 Migration and International Trade
technologies. This means that, given identical actor input combina-
tions in the home and oreign countries, the same output levels could be
achieved. Good Xand good Yare also assumed to be identical (that is,
homogeneous) across the two countries. In other words, a unit o goodXproduced in the home country cannot be distinguished rom a unit o
good Xproduced in the oreign country. The same applies or good Y.
Production o good Xand good Y, in both the home and oreign countries,
is described by standard CobbDouglas production unctions that exhibit
constant returns to scale. This is to say that, in both countries, the output
o good Xwill increase proportionally to an increase in the amounts oL
and Kemployed in the production process. The same, o course, holds or
good Y. Although identical output levels could be achieved in the home
and oreign countries, because actor endowments difer it would be ine-cient or prot-maximizing rms to produce at such levels. This ollows
rom variation in actor endowments that lead to diferences across the
two countries in terms o relative actor prices. Thus, the assumed difer-
ences in actor endowments dictate that prot-maximizing rms in the
home country will employ diferent production technologies than will be
employed by their counterparts in the oreign country.
Regarding the mobility (or immobility) o actor inputs, L and Kare
assumed to be perectly mobile within each country but perectly immobile
between the two. The assumption o perect internal mobility ollows romthe H-O model being a long-run model o trade. Since in the long-run all
actor inputs are variable, the assumption that L and Kcan be costlessly
reallocated between the production o goods Xand Yis certainly reason-
able. The assumption o actors being perectly immobile between the
two countries is analogous to saying there is no international migration
or international capital ows. This assumption o actor immobility is
important in terms o the models appropriateness in identiying the rela-
tionship between migration and trade as being one o complements or o
substitutes.Perect internal competition is assumed in both product and actor
markets. This assumption implies, among other things, perect inorma-
tion. However, imperect external competition is also assumed. There are
no tarifs or non-tarif trade barriers that would hinder trade. Likewise,
there are no exchange controls or transportation costs. In essence, the Law
o One Price holds, and there is nothing permitted in the model that would
lead consumers in either country to avor the output o a local producer
over that o a oreign supplier or that would avor the oreign supplier
over the local producer.
From the general description o the H-O model provided here, we can
state that the predictions o standard actor endowment-based models
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The channels through which immigrants afect trade 23
o trade, with respect to migration, are related to the likelihood that an
individual will choose to migrate. The predictions are not related to the
inuence someone who has migrated may have on trade between their
host and home countries. This emphasis on the efect o increased trade onthe decision to migrate diminishes the useulness o these models in terms
o predicting the efects that immigrants may have on trade subsequent
to having migrated. Nevertheless, working through a simple version o
the model is illustrative as it provides inormation regarding the expected
efects o trade on output, consumption and employment levels, the pattern
o trade, social welare and, most important or our purposes, the prices o
goods Xand Yin each country and, accordingly, wages and incomes.
In autarky, consumption o good Xand o good Y is constrained by
each countrys production capacity. Beginning with a scenario underwhich both the home and oreign countries produce and consume some
amount o each good, the relative prices o the two goods vary across the
countries because o the diferences in actor endowments between the
two. Assuming that the home country is capital-abundant relative to
the oreign country, the oreign country must be labor-abundant relative
to the home country. Further, i good Yis capital-intensive, then the home
country will hold the comparative advantage in the production o good Y,
while the oreign country will hold the comparative advantage in good X,
the labor-intensive good. Using asterisks to denote the oreign country,rom this it ollows that in autarky X. *X and that *Y. Y.
It is these initial diferences in relative prices that serve as the impetus
or trade. The variation in product prices reects the relative abundance o
L and Kin the two countries. Reective oKbeing relatively abundant in
the home country and L being relatively abundant in the oreign country,
we have that K/L > K*/L*. Since actor markets are assumed to be com-
petitive, the implication ollows that relative actor returns (that is, the
wage rate received by labor, w, and the rental rate o capital, r) are such
that w/r > w*/r*.As the two countries open to trade, rms that produce good Y in the
home country will realize P*Y. PY. Likewise, rms that produce good
X in the oreign country will see that X. *X. These price diferentials
will lead to shits in the composition o output in each country towards
the good or which they hold the comparative advantage in production
and away rom the good or which they do not hold the comparative
advantage. They will subsequently export the good or which they hold
the comparative advantage in exchange or the good or which they do
not. Consumers in the home country, seeking to maximize their utilities,
will purchase additional units o good X as long as the expected mar-
ginal utility derived rom the consumption o good Xis greater than the
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24 Migration and International Trade
expected marginal utility gained rom consuming good Y. Given that
good Xcannot be distinguished rom good X*, as long as consumers are
rational and their budgets are constrained to be nite they will choose to
purchase the lower-priced good X* rather than the more expensive goodX. Likewise, consumers in the oreign country will purchase Yinstead o
Y*. Simply put, the capital-abundant nation will produce and export the
capital-intensive good to the labor-abundant nation in exchange or the
labor-intensive good. Similarly, the labor-abundant nation will produce
and export the labor-intensive good to the capital-abundant nation in
exchange or the capital-intensive good. In the example presented thus
ar, being relatively K-abundant, the home country will produce good Y,
the K-intensive good, and export it to oreign, the relatively L-abundant
country, in exchange or the L-intensive good X. This prediction regard-ing the pattern o trade ollows directly rom the H-O ramework and is
known ormally as the HeckscherOhlin Theorem.
The movement rom autarky to ree trade enhances both individual
and social welare in both countries. Specialization and trade increase
each countrys set o consumption possibilities and make it possible that
the consumption o both good Xand good Yincrease in both the home
country and in the oreign country. These aggregate gains are the result o
increases in production and consumption e ciency. Global production
e ciency rises due to each countrys output mix shiting towards whatthey produce best and away rom the good they are relatively ine cient at
producing. Consumption e ciency is increased due to consumers acing a
more pleasing set o choices and prices.
Because units o each actor input are assumed to be homogeneous
within each country, they can be reallocated without cost between the pro-
duction o the two goods. Thus, L and Kwill be reallocated towards the
sector that produces good Yin the home country and towards the sector
that produces good X in the oreign country. Being a long-run model,
ull employment is assumed. That is, the increase in the home countrysproduction o the capital-intensive good, Y, necessitates a decrease in
their production o good X. Similarly, the oreign country will produce
more o the labor-intensive good, X, and less o good Y. This reallocation
o actor inputs towards the goods or which comparative advantage is
held will lead to a decrease in employment in the sector which produces
good Xin the home country and in the sector which produces good Yin
the oreign country. As these actor reallocations and changes in output
mixes occur, the price o good Xrises in the oreign country and alls in
the home country, and the price o good Yrises in the home country and
alls in the oreign country. The implications or associated actor returns
are predicted by the StolperSamuelson Theorem which states that a rise
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The channels through which immigrants afect trade 25
in the relative price o a good will lead to a rise in the return received by the
actor used most intensively in the production o the good, and conversely,
to a all in the return to the other actor.
I conditions regarding actor endowments and actor intensities areas they have been assumed, then initially PX. P*X and P*Y. PY. Because
labor markets are assumed to be competitive, it ollows that wX. w*X and
w*Y. wY, where the subscripts Xand Ydenote whether labor is employed
in the production o good Xor o good Y. As explained above, trade in
good Xand good Ywill have implications or product prices and, hence,
or actor returns. Real wages and incomes increase in both the home
country and the oreign country as nominal wages rise in proportion to the
increases in the prices o goods or which comparative advantage is held and
imported goods are priced lower than they were under autarky. Becausethere are no barriers to trade and no transaction costs, with incomplete
specialization this process will continue until X5 *X and Y5 *Y and
wX5 w*X and w*Y5 wY. That is, the wage rate paid to workers engaged
in the production o good Xand who produce good Y* will all, while the
wage rate paid to workers who produce good Yand good X* will rise. It
is this trade-induced narrowing o the wage diferentials, known as Factor
Price Equalization, which would act to discourage migration i, in act, the
model were to allow or the international movement o labor.
The Factor Price Equalization Theorem predicts that trade leads to aninevitable equalization o goods prices across trading partners and that,
with shared production technology and competitive goods and actor
markets, results in the prices o the productive actors (that is, L and K
in this example) also equalizing across countries. As mentioned, since the
H-O ramework is a long-run model, perect competition prevails. In per-
ectly competitive actor markets, returns depend upon the values o the
actors marginal productivities. The marginal productivity o labor, or
example, is the additional output gained, all else equal, when an additional
unit oL is used in the production process. The marginal product o labordepends on the amount o labor being used in the production process as
well as the amount o capital being used. The level oKacts as a scalar.
Given the assumption o constant returns to scale and two productive
actors, i more o a actor is employed then the marginal productivity o
that actor will decline. The value o each actors marginal productivity,
however, also depends on the market price o the good being produced.
As with the level oKemployed, the market price o the good also acts as
a scalar. A higher market price, all else equal, results in a higher value o
marginal productivity or the employed actors.
As noted, under autarky, the prices or good Xand good Yare expected
to difer across the home and oreign countries. Even i two rms, one
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26 Migration and International Trade
located in the home country and the other in the oreign country, produce
the same good using the same combination oL and K, the diference in
the prices o the goods is su cient to produce variation in actor returns
across the countries. In the H-O model, as it is a variable proportionsmodel, diferences in actor returns afect the rms decisions as to how
much L and K should be employed in the production process. Under
autarky, actor returns should be expected to vary considerably across
trading partners or a number o reasons. With trade, however, there is an
expected equalization o product prices across the home and oreign coun-
tries, and the identical production technologies in the two countries imply
that home and oreign share the same marginal productivity relationships.
As prices equalize, so too do actor returns. Because home and oreign are
assumed to have diferent actor endowments, they will produce using thesame relative amounts oL and Kyet will use diferent absolute amounts
o each actor and thus will produce diferent quantities o good Xand
good Y.
A nal theorem provided by the H-O model, the Rybczynski Theorem,
is very much applicable to our discussion o trade and actor returns. The
theorem states that, i the ull-employment condition is satised, increas-
ing the available quantity o a actor will increase the output o the good
that uses that actor intensively and will decrease the output o the other
good. In the example provided here, the home country is K-abundantrelative to the oreign country and it specializes in the production o the
capital-intensive good Yand exports that good to the oreign country in
exchange or the labor-intensive good X. I we assume that trade is taking
place between the home and oreign countries and labor chooses to migrate
rom the oreign country to the home country, then the implication rom
the Rybczynski Theorem is that the oreign countrys production o good
Xwill decrease and its production o good Ywill increase. In the home
country, there will be an expected decrease in the production o good Y
and a corresponding increase in its output o good X. Since the patterno trade was that o the home country exporting good Y to the oreign
country in exchange or good X, the migration-induced changes in output
compositions lead to less trade as each country begins to produce more o
what it was initially importing and less o what it had been exporting.
The example immediately above assumes migration o the oreign
countrys abundant actor to the home country where it is added to the
stock o the home countrys scarce actor. Another way o saying this is
that, to a certain degree, the oreign countrys relative actor abundance
is diminished as the migration caused the home countrys actor scarcity
to subside. I, on the other hand, labor (being scarce in the home country)
were to migrate to the oreign country (where, again, it is abundant in
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The channels through which immigrants afect trade 27
relative terms), the outcome in terms o the expected inuence on trade
is diferent. Under such a scenario, the home country would produce less
o good Xand more o good Y, while the oreign country would produce
more o good Xand less o good Y. This, in turn, would induce more tradebetween the two countries. Thus, the implication is that migration o the
scarce actor is consistent with a complementary migrationtrade relation-
ship even in the standard H-O ramework.
Further modication o the assumptions which underlie the H-O model
yields theoretical predictions o migration and trade being complementary
activities. Markusen (1983), or example, shows that i trading partners
possess identical actor endowments then relaxing the assumptions o con-
stant returns to scale in production, identical technologies across trading
partners, perectly competitive markets or o no domestic distortions leadsmigration and trade to be potentially complementary activities. Gould
(1994) also notes, as is shown above, that the standard actor endowment-
based model o trade can be consistent with a complementary relationship
between migration and trade i the host country is labor-abundant. Since
the US tends to be capital-abundant relative to the typical immigrant
home country, particularly so or the majority o immigrant arrivals
during recent decades, such an outcome is largely irrelevant. Variants o
the standard model that allow or industry-specic increasing returns to
scale in production or human capital-type externalities are also consistentwith a complementary immigranttrade relationship. Such extensions and
modications, however, represent a movement away rom the standard
actor-endowment ramework and a movement towards the assumptions
that underlie models based on New Trade Theory (NTT).
The Specic-Factors (SF) model is a close theoretical variant to the H-O
model. Known as a short-run version o the H-O model, the SF model
allows or intersectoral mobility o actor inputs; however, at all times at
least one actor is immobile and, as a result, is said to be sector-specic.
Venables (1999) allows or the existence o diferences in actor endow-ments across trade partners and considers the implications o movements
by both the mobile and the sector-specic actors. It is shown that under
certain conditions or example, when scarce actors migrate (as indicated
above in regards to the Rybczynski Theorem) it is possible or migration
and trade to be complements in the SF ramework. However, the general
result remains that migration and trade are substitutes. Mundell (1957),
Svensson (1984), Markusen and Svensson (1985), Ethier and Svensson
(1986) and Wong (1986) also examine the question o whether actor
movements and trade are, rom a theoretical perspective, complements or
substitutes and conclude that the two can be complements or substitutes
depending on the assumptions o the model being considered.
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28 Migration and International Trade
Contrary to actor endowment-based models o trade, models based
on NTT allow or increasing returns to scale in production, international
actor reallocation, monopolistic competition, the presence o transaction
costs, and o other agglomeration orces. Monopolistic competition is akey element with respect to the immigranttrade relationship as it implies
imperect competition, incomplete inormation and product diferentia-
tion. These principal diferences, relative to the actor-endowment rame-
works, result in theoretical modeling that is conducive to the examination
o the inuences o actor movements on hosthome country trade ows.
Generally speaking, unlike basic versions o the H-O and SF models,
NTT-based models suggest a complementary relationship between migra-
tion and trade.
Increasing returns to scale in production can be internal or external.External increasing returns occur at the industry level, while internal
increasing returns are specic to individual rms. Beginning with a sce-
nario in which increasing returns to scale are external to the rm, the
standard model o NTT consists o two countries (home and oreign), two
goods (Xand Y) and two actors o production (labor (L) and capital (K)).
As with the actor-endowment models discussed earlier in this chapter,
this basic version ollows the 2 2 2 ramework. Because each rm
is assumed to be small, markets are assumed to be competitive. I trade
occurs, then the presence o external increasing returns leads rms in eachcountry to specialize in order to garner the associated gains. The reward
received by the intensively-used actor o production will rise. This pro-
vides an incentive or international actor reallocation to occur. I actors
do migrate, then because o the presence o increasing returns to scale in
production there will be a subsequent increase in output in both countries.
This acilitates a corresponding increase in trade.
Increasing returns to scale in production may, on the other hand, be
internal to the rm or to the sector. A standard example would assume
that one o the two sectors is characterized by constant returns to scalein production while the other sector has internal increasing returns to
scale. More specically, we can assume that production in the sector
which produces good Xexhibits constant returns to scale, while the sector
which produces good Yexhibits increasing returns to scale. Further, we
can assume that the home country is relatively large as compared to the
oreign country. This assumption has no bearing on the models theoreti-
cal predictions except or determining the direction o actor ows. In the
presence o monopolistic competition and internal increasing returns
to scale in production, the larger economy (that is, the home country in
this example) will be a net exporter o good Y, which is produced by the
monopolistically-competitive sector. The real return to labor will be higher
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The channels through which immigrants afect trade 29
in the home country, which will spur migration rom the oreign country to
the home country. This will lead the home country and the oreign country
to become more unequal in terms o their labor endowments. This, in turn,
increases the basis or trade. As a result, the relationship between actormovements and trade is one o complements.
It is important to note, however, that while models o trade that are
based on New Trade Theory suggest a positive relationship between
migration and trade, the mechanism through which trade is enhanced is
that o increased production that, in the example o monopolistic com-
petition provided here, is acilitated by inward labor migration. In short,
it is a production-based story o increased output that is attributable to
increased actor inputs which acilitates subsequent increases in trade.
More complex models o trade that account or additional actors, suchas immigrants potential abilities to resolve inormation asymmetries,
not only ofer migration and trade as likely complementary activities but
suggest that migration increases bilateraltrade, specically with the immi-
grants respective home countries. Having provided a cursory review o
trade theory, inasmuch as it relates to the immigranttrade relationship,
we now can consider, in greater detail, the specic channels through which
immigrants are thought to increase hosthome country trade.
2.2 HOW DO IMMIGRANTS AFFECT TRADEFLOWS?
The inuences o immigrants on trade between their host and home coun-
tries may be direct or indirect. As noted in the introduction, the direct
channels are described, broadly, as preerence efects and inormation
bridge efects. These latter efects include cultural bridge efects and/or
enorcement bridge efects. Indirect efects include consumption spillover
efects and FDI-relatedand remittance-undedefects. Table 2.1 categorizesthese efects, and the remainder o this section discusses each in turn.
2.2.1 Preerence Efects and Consumption Spillover Efects
Beginning with immigrants preerences or home country products, such
an efect may increase the host countrys imports rom the immigrants
respective home countries i immigrants arrive in the host country to
nd that desired products or reasonable substitutes are unavailable. This
inuence is reerred to by White (2007a) as transplanted home bias, a play
on the term home bias which was rst used with respect to trade ows by
McCallum (1995). Examining trade between Canadian provinces and US
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30 Migration and International Trade
states, McCallum shows that there tends to be more internal trade and less
external trade than would be predicted by theory even once actors that
may impede international trade are accounted or. McCallum coined the
term to indicate that, once other actors that may determine trade ows
have been accounted or, domestic residents have what appears to be a
preerence or goods that are produced in their home country, that is, a
bias or home country products. White extended the term to a setting in
which immigrants carry their preerences or home country products (thatis, their home bias) to their new host country.
A related, indirect inuence o immigrants on host country imports
involves shits in domestic residents preerences towards goods rom
the immigrants home countries. This may occur as domestic residents
are exposed to home country goods through immigrants consumption
activities. All else equal, i a discernible number o domestic residents
are inuenced such that they alter their consumption behavior then a
measurable increase in the host countrys imports rom the home country
would appear in the trade data. This potential indirect relationship can bethought o as a consumption spillover efect.
An interesting aspect underlying the preerence efect is that, in order
or immigrants preerences to yield discernible increases in imports rom
their home countries, the desired home country goods (or reasonable
substitutes) must: 1) not be readily available in the host country or, i
available, only so in inadequate quantities; and/or 2) the varieties o host
country-available substitutes must be su ciently exp
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