European Economic Perspectives 24

Trade and Migration   

Does trade liberalization discourage migration from poorer to richer countries? In the longer term, yes, but economic analysis and historical evidence suggest a more nuanced view.

International migration is the absentee in the current wave of globalization. Helped by falling communication and transportation costs and by the reduction in policy barriers to commodity and capital flows, trade flows and foreign direct investment have increased in the last 20 years at a faster rate than world production. Migration flows, on the other hand, have shown little change over the same period, excluding the temporary surge that followed the collapse of communism in Eastern Europe. This contrasts sharply with previous integration episodes: in the 19th and early 20th centuries, and in the 1960s, international labour mobility played a central role in fostering economic integration.

The changing stance towards migration policies goes a long way to explaining these trends. At the start of the last century, the attitude toward immigration was quite liberal. Similarly, in the 1960s, governments in receiving countries often took an active role in encouraging migration. Nowadays, the policy imperative has become to limit or even to stop any further immigration. In part, this new attitude reflects the fears that immigration may aggravate unemployment and worsen the domestic income distribution by widening the wage gap between the skilled and unskilled.

But there is little evidence that these concerns are well founded. Nevertheless, in receiving countries, the common view is that migration is excessive and therefore detrimental to the welfare of natives, and somehow that this provides a reason for highly restrictive policies. Clearly, the negative attitude toward immigration reflects more than simple economic concerns. Those opposing immigration fear that it may exacerbate social tensions and erode national identities in host countries, as well as aggravating domestic economic problems.

Pressures to tighten immigration laws have been quite strong, particularly in Europe. Yet immigration policies remain a highly divisive issue in many receiving countries. Attempts to tighten policy have typically led to bitter conflicts among domestic constituencies. Moreover, they also irritate relationships with the sending countries, many of which rely on emigration to alleviate structural imbalances in their labour markets and earn valuable foreign exchange through workers’ remittances. Finally, and perhaps more crucially, immigration controls have so far proved to be quite ineffective in stemming undesired population inflows.

Are there more palatable alternatives to migration policies? If trying to control the symptoms does not work, treating the problem directly by promoting equitable and sustained growth in origin countries might be more effective. Trade integration seems a particularly desirable strategy to alleviate migration pressure for at least two reasons.

• First, trading goods represents a way to exchange the services of the factors embodied in those goods. To the extent that barriers to trade are eliminated and commodity trade increases, the exchange of factor services will also increase and therefore the incentive for factors to move should diminish, in which case trade in goods and the international mobility of factors are ‘substitutes’.

• Second, deeper trade integration is often advocated as a means to achieve faster convergence between countries with different income levels. The experience of the EU, where poorer regions have been rapidly catching up with relatively better off regions, is often cited as evidence. US and, to a lesser extent, EU policy-makers seem to be convinced by these arguments and have negotiated integration agreements with their relatively poorer neighbours.

Yet, as research in a new CEPR volume demonstrates, both theoretical and empirical evidence on the effectiveness of trade integration is far from being conclusive. This analysis suggests that trade liberalization will not always alleviate the incentives for migration from the poorer to the richer countries.

Overall, the research in the volume suggests several observations. First, initial conditions matter. Trade liberalization of high-income countries with middle-income countries is more likely to foster convergence and discourage migration, though liberalization in investment flows could alter this outcome. By the same token, integration of goods markets between economies with very different initial conditions could lead to the opposite outcome: the fall in trade costs could lead to more polarization of production and more migration, this because it is possible that out-migration is impeded by a financial constraint that is relaxed by trade liberalization.

There are therefore good reasons to be relatively optimistic about the migration outlook from Eastern Europe to Western Europe: these are middle-income countries, demographic conditions are stable and, provided that the transition to a market economy is successful, massive migrations should not constitute a significant threat.

Second, short-term effects may be important, even when integration is between countries that are not at the extremes, as in the case of Mexico and the United States. For example, it would appear that the North American Free Trade Agreement encouraged migration, at least in agriculture, in the short term. Disruption of Mexico’s maize production to the benefit of its US counterparts has put downward pressure on unskilled wages on both sides of the border. This is so because maize is a highly protected sector in Mexico and is also very labour-intensive there, while very capital-intensive in the United States. This may be a special case, but it serves to point out that even if technology is available to all ‘off-the-shelf’, the same technologies are not always profitable everywhere at the same time. In the longer term, though, improved conditions in the Mexican economy would still stem migratory pressures.

The policy message is therefore clear. Trade liberalization and migration controls are not alternative policy strategies as suggested by a straightforward application of factor endowment trade theory. They work with differing effectiveness over different time horizons. Migration controls are likely to be somewhat more effective in the short term and, in any case, remain the main tool to avoid massive, and largely undesired, immigration in receiving countries.

But if their objective is to stem migratory pressures, policy-makers’ reliance on migration controls in the short run should not stop them from searching for more forward-looking strategies to alleviate migration pressure in the medium term. Despite theoretical ambiguities and policy disputes, the evidence continues to point towards benefits from trade liberalization.

This article discusses research reported in ‘Migration: The Controversies and the Evidence’ edited by Riccardo Faini, Jaime de Melo and Klaus Zimmermann, and published for CEPR by Cambridge University Press (CUP). Related questions of globalization are discussed in ‘Market Integration, Regionalism and the Global Economy’ edited by Richard Baldwin, Daniel Cohen, André Sapir and Anthony Venables, and also published for CEPR by CUP.

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