Export costs of visa restrictions: evidence from Russia and US

Natalya Volchkova New Economic School

2013

Motivation-1 • Liberalization usually is regarded in terms of

economic policy instruments • “Pure political” or “security inspired” decisions in

international affairs might have strong economic effects as well – both in terms of welfare and redistribution

• Usually very difficult to quantify and evaluate • Might play strong discriminatory role which could

distort “non-discriminatory” economic policy

Plan of presentation

• Introduction: modern views on international trade and exporters, theory and empirics

• Visa as potential trade costs • Empirical evidence

– Study of Russian exporters – US visas: case of Visas Mantis

• Conclusions

What are export costs? Market access vs. marginal costs.

• Trade costs include all costs incurred in getting a good to a final user other than a marginal cost of producing a good itself (Anderson&Wincoop, 2004) – transportation – policy barriers (tariff and non tariff) – information – contract enforcement – currency costs – legal and regulatory costs – local distribution costs

• Visa restrictions usually are regarded as an obstacle to tourists, not to export

• However, case study indicates that 30% of costs that medium sized Russian firm incurs to start export activity are spent on business trips. It implies obtaining visa stamp in case the buyer is in visa restricted country.

• Visa costs might include time costs, direct monetary costs, risks of not obtaining visa on time which also might contribute to contract enforcement costs

Case: direct costs of starting exporting for medium size enterprise in Russia (March, 2012)

New expenses What for Costs per month, $ Share of costs

Marketing specialist Foreign market research 1 300 8

Lawyer Support on foreign country legislation

1 600 10

Logistic specialist Perform logistic and customs clearance

1 300 8

Financial specialist Provide financial and insurance guarantees

2 000 12

Trade representative Representation 2 000 12

Customer support Support 2 000 12

Translator Translation 1 000 6

Travel Business trips 5 000 30

Total 16 200 100

Research question • Visa restrictions might be one of the costs of

exporting: – What are the export costs of visa restrictions? – Fixed or variable costs? – Mechanism behind visa costs of export?

• Pure monetary and time costs • Inability to enforce contracts in case of visa refusal

might increase costs of contract enforcement

Visa restriction across the world • Eric Neumayer, 2010,2011

– The effect of visa on travels, bilateral trade flows and FDI is found to be significantly negative

• Cross-country study, gravity analysis, usual problems: omitted variable, endogeneity, selection bias, inability to distinguish between market access and variable costs

Visa restrictions faced by nationals of country traveling to other countries (darker shades mean more restrictions). Source: Neumayer, 2010

EXPORT COSTS OF VISA RESTRICTIONS: EVIDENCE FROM RUSSIA

CASE 1

Empirical study-1: Russian exporters

• Russian firm-level data: exploit variation of firms’ export across destinations over time – Analysis of destination selection – Analysis of export value controlling for selection

• Control for exported goods’ nature to differentiate between mechanisms

Results

• Visa restrictions have significant negative market access effects. The effect is bigger for export of relation-specific goods than for export of non-relation specific goods

• Controlling for choice of destination visas have significant negative effect of value of export of relation-specific goods.

Model specification (derived from Helpman, Melitz, Rubinstein, 2008)) 𝑉𝑎𝑎𝑎𝑎 𝑜𝑜 𝐸𝐸𝐸𝑜𝐸𝑡𝑑𝑑ℎ = 𝛼 + 𝛽 ∗ 𝑉𝑉𝐸𝑑𝑑 + 𝛾𝛾𝛾𝑃𝑑𝑑 + 𝜆𝑑ℎ + 𝑎𝑑𝑑ℎ

𝑃𝐸𝑜𝑃𝑎𝑃𝑃𝑎𝑃𝑡𝑃 𝑜𝑜 𝑎𝐸𝐸𝑜𝐸𝑡𝑑𝑑ℎ= 𝛼 + 𝛽1 ∗ 𝑉𝑉𝐸𝑑𝑑 + 𝛽2 ∗ 𝐹𝑉𝐸𝑑𝑑 + 𝛾𝛾𝛾𝑃𝑑𝑑 + 𝜆𝑑ℎ + 𝜖𝑑𝑑ℎ

+

+

-

+/-

Selection of export destinations

Export value -

Data • Russian customs exporter invoices. For each individual

package exported through customs we know – firm - sender, good‘s code and description, country-recipient, firm-

recipient , statistical value of export (and many more details) (Russian FCS)

• Costs of exporting: – tariff rates imposed by destination country on Russian export of

particular good (WITS), averaged across export basket of the firm

– visa restriction by destination country on Russian citizens (MIA, tourist agencies)

– proxies for other costs : language, historical relations, common border

• Destination control – GDP PPP (WDI)

• Time – 2003-2010

Data on visas

• We define visa variable – No visa restrictions – Can stamp visa at airport free of charge

– Visa required and should be obtained in consulate - Visa might be bought in airport

• 35 visa regimes changed over 2003-2010 – AG AR BB BW CR DM GD GU HK HT IL JO LA MA

MP MV MY PH RS SV SZ TH VE VN … – mostly visa waivers, few visa introductions

NO VISA, =0

YES VISA, =1

# Country Visa

(change) # Country Visa

(change) # Country Visa

(change) 1 Afghanistan 1 61 Germany 1 121 North Korea 1 2 Albania 1 62 Ghana 1 122 Norway 1 3 Algeria 1 63 Great Britain 1 123 Oman 1 4 Andorra 1 64 Greece 1 124 Pakistan 1 5 Angola 1 65 Grenada 0 125 Palau 0 6 Antigua And Barbuda 1 66 Guatemala 1 126 Palestinian Territories 0 (2009) 7 Argentina 0 (2009) 67 Guinea 1 127 Panama 1 8 Armenia 0 68 Guinea-Bissau 0 (2010) 128 Paraguay 1 9 Australia 1 69 Guyana 0 (2010) 129 Peru 0

10 Austria 1 70 Haiti 0 130 Philippines 0 (2007) 11 Azerbaijan 0 71 Honduras 0 (2009) 131 Poland 1 12 Bahamas 1 72 Hungary 1 132 Portugal 1 13 Bahrain 0 73 Iceland 1 133 Qatar 1 14 Bangladesh 1 74 India 1 134 Romania 1 (2004) 15 Barbados 0 (2007) 75 Indonesia 0 (2005) 135 Rwanda 1 16 Belgium 1 76 Iran 1 136 Saint Kitts And Nevis 1 17 Belize 1 77 Iraq 1 137 Saint Lucia 1

18 Benin 1 78 Ireland 1 138 St Vincent and the Grenadines 0

19 Bolivia 1 79 Israel 0 (2008) 139 Samoa 0 (2010) 20 Bosnia And Herzegovina 0 (2007) 80 Italy 1 140 San Marino 1 21 Botswana 0 81 Jamaica 1 141 Sao Tome And Principe 1 22 Brazil 0 (2010) 82 Japan 1 142 Saudi Arabia 1 23 Brunei Darussalam 1 83 Jordan 0 143 Senegal 1 24 Bulgaria 1 84 Kazakhstan 0 144 Serbia 0 (2009) 25 Burkina Faso 1 85 Kenya 1 145 Seychelles 0 26 Burundi 1 86 Kuwait 1 146 Sierra Leone 1 27 Cambodia 1 87 Kyrgyzstan 1 147 Singapore 1 28 Cameroon 1 88 Lao People's Dem R 1 148 Slovakia 1 29 Canada 1 89 Latvia 1 149 Slovenia 1 30 Cape Verde 0 90 Lesotho 1 150 Somalia 1 31 Central African Republic 1 91 Liberia 1 151 South Africa 1 32 Chad 1 92 Libya 1 152 South Korea 1 33 Chile 1 93 Liechtenstein 1 153 Spain 1 34 China 1 94 Lithuania 1 154 Sri Lanka 0 35 Colombia 1 95 Luxembourg 1 155 Suriname 1 36 Congo, Republic Of 1 96 Macedonia 0 (2008) 156 Swaziland 0 37 Congo, The Dem Rep 1 97 Madagascar 0 157 Sweden 1 38 Costa Rica 1 (2008) 98 Malawi 1 158 Switzerland 1 39 Cote D'Ivoire 1 (2008) 99 Malaysia 0 (2006) 159 Syrian Arab Republic 0 (2010) 40 Croatia 0 (2010) 100 Maldives 0 160 Taiwan 1 41 Cuba 0 101 Mali 1 161 Tajikistan 0 42 Cyprus 1 102 Malta 1 162 Tanzania 0 (2010)

Some details about the sample • Sample size: 3, 732, 613 observations at

selection stage – only manufacturing goods: HS between 15.00-

37.99 – 75 000+ firms, that were exporters at least once

over those years – 48% of firms exported only once, 20% - twice – 180 destinations – 8 years

Visa endogeneity? • To deal with possible endogeneity we use tourist

flows between countries as an instrument • To correct for the possible interaction between

bilateral export flows and tourist flows we use “predicted” measures of tourist flows from Russia to each destination: – Measure tourist attractiveness of each destination

based on the inflow of tourists from the whole world to this destination

– Multiply the aggregate outflow of Russian tourists each year by the attractiveness of each destination

Mechanism of visa effect? • Pure financial costs irrespective of type of good? Or depends

on the nature of trades goods? • Information: about foreign markets, about buyers, dealers…

– Jiang (2007), Blum et al (2008) • Contract enforcement

– Nunn (2007) • Long-term contacts

– Akermany (2010) • Add one more dimension – relation specificity of exported

good – follow Rauch (1999) to differentiate between relation specific

and non relation specific goods • 77% of firms in the sample export relation specific goods only • 14% - non relation specific goods only • 9% - export both types of goods

Hypothesis

• If visa costs include the costs of contract enforcement (or seller-buyer specific costs) then – differentiated effect of visa across

goods with different contractibility nature : expect more pronounced effect for relation-specific goods compared to non relation specific

Estimation results (conditional logit)

ALL GOODS

Relation Specific

Non-Relation Specific

Visa = 1 -0.360*** -0.402*** -0.259*** (0.021) (0.024) (0.039)

Tariff rate (log) 0.001 0.019** -0.012 (0.008) (0.009) (0.017)

WTO dummy -0.009 0.075*** -0.154*** (0.023) (0.027) (0.042)

GDP PPP (log) 0.657*** 0.647*** 0.644*** (0.007) (0.008) (0.012)

Former Soviet Union Dummy 2.447*** 2.613*** 1.794*** (0.042) (0.050) (0.072)

Landlocked 0.936*** 1.018*** 0.779*** (0.025) (0.027) (0.052)

Dummy for contiguity 0.463*** 0.574*** 0.311*** (0.027) (0.031) (0.058)

Distance (log) -0.715*** -0.632*** -0.890*** (0.022) (0.024) (0.041)

Observations 2,776,376 2,349,629 648,125 Firm-Year FE YES YES YES Cluster YES YES YES Robust standard errors in parentheses, clustered at firm level *** p<0.01, ** p<0.05, * p<0.1

Estimation results (OLS, IV) Relation Specific Non Relation Specific

Selection Export value Selection Export value (1) (2) (3) (4)

Visa dummy -0.005*** -2.813* -0.011*** -5.295 (0.002) (1.657) (0.003) (4.238) Tariffs (log) -0.002*** 0.143** -0.002*** 0.095 (0.000) (0.066) (0.000) (0.092) WTO = 1 -0.018*** 1.010 -0.007*** 2.303 (0.001) (0.680) (0.001) (1.580) GDP PPP (log) 0.006*** 0.217*** 0.007*** 0.322*** (0.000) (0.033) (0.000) (0.041) Former Soviet Union Dummy 0.080*** -1.177 0.041*** -3.169 (0.002) (0.946) (0.003) (2.182) Dummy for contiguity 0.036*** 1.085*** 0.029*** 1.433** (0.001) (0.324) (0.002) (0.611) Distance (log) -0.001** -0.036 -0.008*** -0.541 (0.000) (0.077) (0.001) (0.349) Observations 2,925,511 38,124 781,457 11,181 Number of firm-year 27,721 7,955 7,416 2,247 Firm-Year FE YES YES YES YES Cluster YES YES YES YES Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1

Conclusions • Visa restrictions have strong selection

(market access) effects in all specifications • Controlling for selection visas also have

strong volume effect on relation specific export

• Visa have bigger effect on selection into exporters of RS goods than exporters of NRS goods

• Visa have significant negative effect on export value of RS goods – consistent with contractual nature of visa

costs

EXPORT COSTS OF VISA RESTRICTIONS: CASE OF VISA MANTIS

CASE 2

This case • Estimates the effect of additional security

restrictions applied by US Department of State to travelers from visa restricted countries that work with some technologies.

• Extra scrutiny faced by affected travelers results in extra time waiting for visa stamp.

• We find that US import of goods related to these technologies grows 5% a year slowly than import of goods not related to these technologies from countries whose citizens are subject to US visa constraints compared to countries without them.

Visas Mantis

• Visa applications for persons to study or work in certain sensitive scientific and technical fields are subject to an interagency clearance in Washington, DC, called Visas Mantis.

• Since 1998, the Visas Mantis clearance process has been used to screen against the illegal transfer of technology.

• Foreign students in many technical fields are subject to this clearance

• Business visitors and visitors for pleasure receive Mantis clearances valid for 1 year

US DoS. February 11, 2005

Security Advisory Opinion (SAO)

Source: US Government Accountability Office, 2005

SAO procedure lasts on average 6 to 8 weeks (US DoD, 2008) • (as of 2004) 5% cases were taking 31–60 days, 5% were taking 61–90 days,

1% were taking 91–120 days, 2% were taking more than 120 days

Between 2-3% of all nonimmigrant visa applications require an SAO

Technology Alert List • The list, published by the State Department in

coordination with the interagency community and based on U.S. export control laws, includes science and technology-related fields where, if knowledge gained from research or work in these fields were used against the United States, it could potentially be harmful.

• TAL 2002

SAO and TAL : poorly defined procedure • China and Russia account for roughly 76 percent of all Mantis cases. However, we

found that some consular officers at these posts remain confused about how to apply the Mantis program. For example, Beijing consular officers, some of them new to the post, consistently told us that they needed more clarity and guidance regarding how to use the Technology Alert List (TAL). According to a key consular official in Beijing, because these officers generally do not have scientific or technical backgrounds, they often do not understand what entries on the TAL mean or whether the visa applicant has advanced knowledge about the subject he or she plans to study in the United States. They are also confused about how to apply vague, seemingly benign categories. For example, officers in Beijing did not know whether to continue submitting Mantis requests for all individuals that fall under the category of “Communications – wireless” even if the visa applicant works for a foreign multinational corporation that is not a Chinese government-owned telecom enterprise. Few of the consular officers we spoke with in China, Russia, or Ukraine were familiar with the quarterly reports issued by Consular Affairs on Mantis issues. The only officer aware of the classified webpage maintained by the Consular Affairs Bureau told us that he did not find it useful because it had very little information on it and because it was hard for him to access the classified computer system, which is housed in a separate building far from the consular section.

GAO, 2005

Model specification

• To evaluate the effect of extra visa clearance we estimate the following equation

where growth ij – growth in country j export to US of product i visaj – dummy indicator if citizens of country j are required visa to enter US TALi - dummy indicator if product i is related to a technology in TAL Xij – additional controls (initial condition, value of exportij in the beginning of the period) FEj, FEi – country’s and product’s fixed effects

Data • Bilateral trade flows between all countries in the

world and US – UN COMTRADE, 6-digit HS codes – Use export data reported by all countries and import data

reported by US

• Visa restrictions – International Civil Aviation Association’s Travel Information

Manual (IATA)

• TAL classification for products – coded at 6-digit HS classification

• Time – 2002-2010

US visa requirements • US requires visa for citizens of all countries except

– Canada – Andorra, Australia, Austria, Belgium, Brunei, Czech Rep.,

Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland (Rep. of), Hungary, Italy, Japan, Korea (Rep), Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Slovak Rep, Slovenia, Spain, Sweden, Switzerland, Taiwan, United Kingdom

– Commonwealth of the Northern Mariana Islands – Republic of Marshall Islands, Micronesia (Fed. States of), or the

Republic of Palau* – Bahamas* – British Overseas Territory of Bermuda – Mexico* (NAFTA Professionals)

• Almost no variation over period of study

US visa waiver

Estimation results -1 Value of trade growth in 6-digit HS groups, 2002-2010

as reported by US as reported by exporters VISA*TAL -0.211*** -0.211*** -0.211** -0.211** -0.350*** -0.350*** -0.350** -0.350**

(0.034) (0.038) (0.084) (0.085) (0.045) (0.045) (0.146) (0.146) Value of trade in 2002 -0.337*** -0.337*** -0.337*** -0.337*** -0.405*** -0.405*** -0.405*** -0.405***

(0.003) (0.004) (0.013) (0.013) (0.003) (0.004) (0.018) (0.018) Constant 1.685 1.685*** 1.685*** 1.685*** 0.766 0.766 0.766*** 0.766***

(1.734) (0.054) (0.317) (0.071) (1.238) (0.646) (0.167) (0.123) Product FE YES YES YES YES YES YES YES YES Country FE YES YES YES YES YES YES YES YES Observations 83,650 83,650 83,650 83,650 74,049 74,049 74,049 74,049 R-squared 0.33 0.33 0.33 0.33 0.304 0.304 0.304 0.304

Error terms are clustered at No Product Country

Product and

Country No Product Country

Product and

Country Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Estimation results -2

Annual growth in value of trade in 6-digit HS groups, 2002-2010

as reported by US as reported by exporter Sample restricted to balance a panel

Sample restricted to balance a panel

VISA*TAL -0.117*** -0.0562*** -0.199*** -0.0676*** (0.008) (0.008) (0.010) (0.011)

Value of trade in t-1 -0.152*** -0.318*** -0.212*** -0.360*** (0.001) (0.002) (0.001) (0.002)

Country-Year FE YES YES YES YES Product-Year FE YES YES YES YES

Observations 760,926 457,296 763,826 401,382 R-squared 0.076 0.133 0.105 0.168 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

To explore panel structure of data:

Conclusions

• We find that US import of goods related to TAL technologies grows 5% a year (25% over 2002-2010) slowly than import of goods not related to these technologies from countries whose citizens are subject to US visa restrictions compared to countries without them.

Conclusions based on two cases: visa restrictions as an instrument of distortive

trade policy • We confirm that visa restrictions contribute to foreign

market access costs • Visa restrictions may introduce discriminatory biases in

several dimensions – Firms from visa exempt countries may have easier access

than firms from visa restricted countries – Goods less sensitive to specific relations have easier access

to visa restricted foreign markets than goods more sensitive to relations

– Security restrictions related to visa stamps and conditional on technologies can discriminate across technologies and related industrial sectors in terms of their access to visa restricted foreign markets