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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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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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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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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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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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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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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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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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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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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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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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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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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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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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).


27/233

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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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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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


31/233


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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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


33/233


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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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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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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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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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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Migration and International Trade