The Unintended Consequences of International Capital Mobility on Immigration and Trade Maggie Peters

Stanford University

IPES Conference

November 15, 2008

The Puzzle Two eras of globalization

1820-1914 1945-present

First era was marked by mass migration but less trade Variation within the period:

Trade Protection: Great Britain low tariffs, US high tariffs Immigration: Great Britain and US restrict immigration at the same time

Brazil and Australia still funding passage Second era has been marked by large amounts trade but much less

migration Variation within the period:

Trade: Gradual decrease in trade barriers throughout much of the world, but high tariffs remain in some states, for example within the Persian Gulf

Immigration: Varies from Japan (allows in very few immigrants) to states of the Persian Gulf (Qatar and UAE with almost 80% of population foreign born)

The Puzzle Emerging Pattern

Often see open immigration policies combined with high levels of trade protection

Often see low levels of trade protection combined with closed immigration

Question of this paper – why do we see this pattern so often?

Putting Trade and Immigration together Firms (and Portfolio Investors) have a choice

Produce (invest) at home Produce (invest) overseas and ship the product back

Preferences of Firms Choice of production location depends on

Trade protection back home (endogenous) Is there enough protection to make production at home

competitive? Will the good be treated as a foreign good and will sales

be hurt by protection? Cost of labor (endogenous) Cost of producing overseas (exogenous)

Transportation costs, transaction costs, risk of expropriation

Preferences of Firms

When capital is less mobile internationally, firms in labor scarce states want Trade protection

Increases the price of the good, but also increases wages for labor

Open immigration Keep the cost of labor down

Preferences of Firms Increases in international capital mobility change

preferences of all firms Firms that produce overseas

Low trade barriers to their goods (and other goods) And if immigration is costly, do not want immigration Pro-free trade, Anti-immigration

Preferences of Firms Firms that produce at home

Want other firms to leave the country, releasing their workers Obtain cheaper labor without moving or importing it Want protection on own good and no protection on other goods,

but incentive to lobby tempered by mobility Less mobile firms fight hard for protection for own good against protection

for other goods More mobile firms do not fight hard for protection on their own goods or

against protection on other goods, as they have an outside option Want less immigration (unless it can be targeted) Pro-free trade, Anti-immigration

Capital mobility Increases size of free trade lobby Decreases size of open immigration lobby

International Capital Mobility Changes in international capital mobility is the

key parameter Variation occurs due to

Technology Changes in international investment climate/ security

of investments abroad Change in capital controls: assume that this is

exogenous to the model Cross-national variation in industry composition

Different mix of mobile and immobile industries

Other Interest Groups Not all about capitalists

Labor: both high and low skilled Immigrants: sometimes allowed to participate

Preferences of these groups do not change over capital mobility

Low Skilled Labor always wants trade protection and closed immigration

Immigrants want trade protection and open immigration High Skilled Labor wants open trade and immigration so

that prices are at world prices Assumes majority of potential immigrants are low skilled Assumes high skilled workers are not threatened by highly skilled

immigrants

Equilibrium Policy Outcome Need to assume objective function of policymaker Use Grossman and Helpman (1994)

Policymaker cares only about contributions from interest groups and overall size of the economy

Policymaker chooses any level of trade protection and any number of immigrants

Equilibria based on Power of groups to influence the government Interests of groups: opposing, orthogonal, parallel Importance of contributions versus overall size of the

economy

Equilibrium Policy No capital mobility

Capital (with immigrants) fights low skilled labor for open immigration Low skill intensive capital bandwagons with low skilled labor (and immigrants)

for protection Trade protection paid for by immigration; immigration paid for by trade

protection Capital mobility (t=1)

Immigrants (and high skilled labor) fight capital and labor for open immigration Stronger incentives for industries to fight trade protection in other industries More trade protection for immobile industries than for mobile industries, lower

trade protection and less immigration overall Capital mobility (t=T+1)

Immigrants (and high skilled labor) fight capital and labor for open immigration Off-shoring firms fight protection in own industry Cascade effect: Off-shoring leads to less protection and immigration leading to

more off-shoring

Conclusion International Capital Mobility key parameter Other important parameters

Cost of immigrants Ability of groups to organize (especially labor) Importance of contributions versus overall size of the economy or

other factors to the policymaker Equilibria policies

Obtain high levels of trade protection with high levels of immigration when capital mobility is low Like many states in mid-19th Century, Persian Gulf today

Obtain low levels of trade protection with low levels of immigration when capital mobility is high Like Great Britain at start of 20th Century, most of the OECD today

International Capital Mobility explains Variation in immigration and trade policies over time And variation between countries

Cost of Immigration

PreferencesPreferences Incentives to Lobby

Potential lobbying group

No Capital Mobility Capital Mobility, t=1

Capital Mobility, t=T+1

No Capital Mobility

Capital Mobility, t=1 Capital Mobility, t=T+1

Immobile Capital (also includes mobile capital producing at home at time t=T+1)

Trade protection on own goods, no protection for other goods, open immigration

Trade protection on own good, no protection for other goods, closed immigration

Trade protection on own good, no protection for other goods, closed immigration

Organize for trade protection and open immigration

Organize for trade protection in own good, strongly lobby against protection in other goods, strongly lobby for closed immigration

Same as in capital mobility t=1 case

Mobile capital (only includes those producing overseas at time t=T+1)

Does not exist Due to home bias, weakly prefers protection on own good, no protection on other goods, and open immigration

Open trade for all goods, closed immigration

Does not exist Weak incentive to lobby for protection in own good, no protection in other goods, and open immigration

Strong incentive to lobby against protection in own good, weak incentives to lobby against protection in other goods and against open immigration

Labor Trade protection for LSI goods, restrictive immigration

Same as in immobile capital

Same as in immobile capital

Lobby for trade protection on LSI goods and restrictive immigration

Same as in immobile capital

Same as in immobile capital

Immigrants Trade protection for LSI goods, open immigration

Same as in immobile capital

Same as in immobile capital

Lobby for trade protection on LSI goods and open immigration

Same as in immobile capital

Same as in immobile capital

High Skill workers

No trade protection, open immigration until marginal cost of immigrants equals marginal increase in consumer surplus

Same as in immobile capital

Same as in immobile capital

Weak incentive to lobby for no trade protection and for limited immigration

Same as in immobile capital

Same as in immobile capital

The Formal Model: Utility Functions Capital:

)(),(),(),( psprNqppW iiiii

,iii CWV

Labor produced by capitalists

Profit from capital

Proportion of the population that owns this type of capital

Government transfers and consumer surplus

The Formal Model: Utility Functions Labor:

Labor produced by labor times their wage

Proportion of the population that is labor

Government transfers and consumer surplus

,lll CWV

)(),(),( psprNqpW lll

The Formal Model: Utility Functions Immigrants:

Labor produced by immigrants times their wage

Proportion of the population that is an immigrant

Government transfers and consumer surplus

,imimim CWV

)()(),(),( HpsprNqpW imimi

Extra transfer to immigrants

Utility from immigration policy

The Formal Model: Utility Functions High Skilled Workers:

Labor produced by high skilled workers

Proportion of the population that is high skilled

Government transfers and consumer surplus

,hh WV

)(),(),( psprNpW hhh

The Formal Model: Policymaker’s objective function

),(),( paWpCGLk

k

)(),(),()(),(11

psprNqpqpWK

kkk

K

kimlhk

Labor produced by capitalists and high skilled workers

Labor produced by labor and immigrants

Profits of all firms

Total transfers and consumer surplus

The Formal Model: Effects of a Price Change in Good i For Capitalists who own good i:

For Capitalist who own good j:

),(),(),(),(

psprNp

q

q

qp

p

qp

p

Wi

i

ii

i

ii

i

i

),(),(),(

psprNp

q

q

qp

p

Wj

i

jj

i

j

Table 2: Total effect of price increase of good i on good j

Good i/ good jLow skill labor intensive High skill labor intensive

Low skill labor intensive Large increase in wage bill Small increase in wages but for many workers

High skill labor intensive Large increase in wages but for few workers

Small increase in wage bill

The Formal Model: Effects of a Price Change in Good i For Labor:

For Immigrants:

For High Skilled Workers:

),(),( psprNp

q

p

Wll

ii

l

),(),( psprNp

q

p

Wimim

ii

im

),(),( psprNp

Wh

i

h

The Formal Model: The Effect of a Change in the number of immigrants For Capitalists

For Labor

For Immigrants

For High Skill Workers

),(),(),(

pspr

Nq

q

qpWi

iii

where N

pr

),(

),(),(

ps

prN

qWll

l

)(),(

),( Hps

prN

qWimim

im

),(),(

ps

prN

Wh

h

Extension 1 – firms can move, t=1 Firms are now allowed to move overseas Move if New welfare function for the firm:

),,()0,,( ** qpqp iii

)(),(),,(),( psprNqppW iiiii

Extension 1 – Effects of Offshoring For other capitalists:

For labor:

For immigrants:

For high skilled workers, no direct effect.

For the government:

0)0,,(

i

kk

i

k

m

q

q

qp

m

W

0

lii

l

m

q

m

W

0

imii

im

m

q

m

W

0

iii m

W

m

C

m

G

Extension 2 – Some firms have already moved Welfare change due to price increase in good i for capitalists in good i

who have moved

For firms who produce good j overseas

Change in immigration policy for firms that offshore

),(),(),,(

psprNp

qp

p

Wi

i

ii

i

i

),(),( psprNp

Wj

i

j

),(),(

ps

prN

Wi

i