5  Previous econometric tests of the effects of migration on trade

Previous econometric tests of the effect of migration on trade have, like ours, been based on a gravity model of trade. The gravity model has been highly successful in describing empirical patterns of international trade (Frankel 1997). It can be derived in a number of different ways. Rauch (1999) and Head and Ries (1999) provide an intuitively appealing derivation, which we summarise here.

The derivation starts from a proposition about the pattern of trade in a frictionless world. Let be the value of New Zealand’s imports from country (the expression for New Zealand’s exports to country is exactly symmetrical). Let, , and be the GDPs of New Zealand, country , and the world. In the absence of transport or transaction costs (and with some additional assumptions about product differentiation and preferences) New Zealand consumes the output of country in proportion to New Zealand’s share of world output , so that

(1)    

In practice, transport costs, tariffs, and transaction costs induce departures from this pattern. These effects are modelled by applying an adjustment factor to the right hand side of Equation 1, where is a vector that includes a range of variables attempting to capture transport and transaction costs. Taking logs yields the equation

(2)    

One variable that is almost always included is the distance between the two countries. The distance variable tries to measure transport and communication costs, but it is generally believed to pick up cultural, institutional, and linguistic differences as well. Transport and communication costs have fallen over time, but it is not clear how the impact of culture, institutions, and language have changed. Because the effect of distance is not a central concern of the paper, we decided to follow tradition and assume that the effect of distance is constant over time (though the use of time dummies, described below, provides some protection against any biases introduced by changes in the effect of distance.) Other frequently used variables include oil prices, real exchange rates, common languages, common borders, membership of trade blocs, and colonial ties. It has become standard to also include a population or a GDP per capita variable, to allow for effects such as subsistence thresholds or self-sufficiency.

For studies of migration and trade, the key variable in is one measuring the number of migrants from each potential trading partner living in the country of interest. In principle, a variable measuring the number of migrants from the country of interest living in each potential trade partner country should also be used. The necessary data are, however, difficult to obtain. The only study to include such a variable is one on overseas Chinese (Rauch and Trindade 2002).

Table 2 summarises results from the nine previous econometric studies of migration and trade that we have located. The studies cover five host countries—the United States, Canada, the United Kingdom, Spain, and France—and various trading partners, though in the case of Combes et al (2003) the trade in question is between different regions of France. Dunlevy and Hutchison (1999, 2001) use data from 1870 to 1910; all the other studies use more recent data. Some studies use data from a single period, while others use time series techniques to combine data from several periods. Some studies fit the model in its original multiplicative form using non-linear statistical models, and others take logs of both sides and use linear models.

The export and import elasticities in Table 2 show the extent to which an increase in the size of the immigrant stock increases trade. The elasticities derived by Gould (1994), for instance, imply that, all else equal, a 1% increase in the number of immigrants resident in a country would increase exports from that country by 0.02% and increase imports to that country by 0.01%. In cases where several specifications are presented, elasticities from the authors’ main or preferred elasticity are cited. Wherever possible, average elasticities across all goods and all trade partners are shown.

^aThe estimate of 0.21 applies to homogenous goods, and 0.47 to differentiated goods; insufficient data were included in the article to allow the calculation of an overall elasticity. No distinction is made between imports and exports. ^bExport elasticity refers to exports from Canada to Taiwan, import elasticity refers to exports from Taiwan to Canada.

Notes – Rows 1-6 are based on Table 1 in Wagner, Head, and Ries (2002). The elasticities for Gould (1994) and Rauch and Trindade (2002) were calculated by Wagner et al. The elasticities for Girma and Yu (2000) and Ching and Chen (2000) were calculated by the present authors.

As is apparent from Table 2, most studies find some relationship between migration and trade, in the expected direction, though the magnitudes of the estimated effects vary greatly. All the studies shown in Table 2 also investigate how the relationship between migration and trade varies across goods, countries or the type of migrant. Gould (1994) and Dunlevy and Hutchinson (1999, 2001), for instance, find that the effect of migrants is stronger for consumer goods than producer goods. Rauch and Trindade (2002) and Wagner, Head, and Ries (2002) find that the effect is stronger for differentiated goods than for homogenous goods. Girma and Yu (2000) find that the effect is stronger when there are no colonial ties; Blanes-Cristobal (2003) obtains the opposite result. Ching and Chen (2000) find that the effect is stronger for entrepreneur rather than passive investment type migrants.

Gould (1994: 307) and Wagner, Head, and Ries (2002: 520-22) experiment with alternative specifications in which the elasticity of trade with respect to migration changes as the number of migrants increases. They find that the elasticity decreases with the number of migrants. This is a very strong form of diminishing returns. Diminishing returns in the ordinary sense of each migrant contributing less than the one before is already possible under the constant-elasticity specification[6].

All the studies summarised in Table 2 looked at trade in goods rather than services. We know of no studies that have looked at the effect of migrant stocks on exports of services, even though migration could plausibly lower transaction costs for trade in services in the same way that it lowers costs for trade in goods.