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   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-19 th 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 20 th 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

Preferences Incentives to Lobby Potential lobbying group No Capital MobilityCapital Mobility, t=1 Capital Mobility, t=T+1 No Capital Mobility Capital Mobility, t=1Capital 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 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 existDue 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 existWeak 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 LaborTrade protection for LSI goods, restrictive immigration Same as in immobile capital Lobby for trade protection on LSI goods and restrictive immigration Same as in immobile capital ImmigrantsTrade protection for LSI goods, open immigration Same as in immobile capital Lobby for trade protection on LSI goods and open immigration 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 Weak incentive to lobby for no trade protection and for limited immigration Same as in immobile capital

The Formal Model: Utility Functions Capital: 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

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 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

The Formal Model: Policymaker’s objective function 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 : Table 2: Total effect of price increase of good i on good j Good i/ good j Low skill labor intensiveHigh skill labor intensive Low skill labor intensiveLarge increase in wage billSmall increase in wages but for many workers High skill labor intensiveLarge 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:

The Formal Model: The Effect of a Change in the number of immigrants For Capitalists For Labor For Immigrants For High Skill Workers where

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

Extension 1 – Effects of Offshoring For other capitalists: For labor: For immigrants: For high skilled workers, no direct effect. For the government:

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