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


Obtain low levels of trade protection with low levels of
immigration when capital mobility is high


Like many states in mid-19th Century, Persian Gulf today
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
Preferences
Preferences
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:
Vi  Wi  Ci ,
Profit from
capital
Government
transfers and
consumer
surplus



Wi ( p,  )   i   i ( pi , q)   i N r ( p,  )  s( p)
Labor
produced
by
capitalists
Proportion
of the
population
that owns
this type of
capital
The Formal Model: Utility Functions

Government
transfers and
consumer
surplus
Labor: Vl  Wl  Cl ,



Wl ( p,  )   l q   l N r ( p,  )  s( p)
Labor
produced
by labor
times their
wage
Proportion
of the
population
that is
labor
The Formal Model: Utility Functions

Immigrants: Vim  Wim  Cim ,
Government
transfers and
consumer
surplus
Utility from
immigration
policy



Wi ( p,  )   im q   im N r ( p,  )  s( p)     H (  )
Labor produced
by immigrants
times their
wage
Proportion of the
population that is an
immigrant
Extra
transfer to
immigrants
The Formal Model: Utility Functions

High Skilled Workers: Vh  Wh ,
Government
transfers and
consumer
surplus




Wh ( p,  )   h   h N r ( p,  )  s( p)
Labor produced
by high skilled
workers
Proportion of the
population that is high
skilled
The Formal Model: Policymaker’s
objective function


G   C k ( p,  )  aW ( p,  )
kL
Labor produced by
labor and immigrants
Total transfers and
consumer surplus
K
K



W ( p,  )    k   h  q( l   im )    k ( p k , q)  N r ( p,  )  s ( p)
k 1
Labor produced by
capitalists and high
skilled workers
k 1
Profits of all firms
The Formal Model: Effects of a Price
Change in Good i

For Capitalists who own good i:
Wi  i ( pi , q)  i ( pi , q) q




  i N r ( p,  )  s( p,  ) 
pi
pi
q
pi

For Capitalist who own good j:
 j ( p j , q) q



  j N r ( p,  )  s( p,  ) 
pi
q
pi
W j
Table 2: Total effect of price increase of good i on good j
Low 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
Good i/ good j
The Formal Model: Effects of a Price
Change in Good i

For Labor:
Wl
q



 l   l N r ( p,  )  s( p,  ) 
pi
pi

For Immigrants:
Wim q



 im   im N r ( p,  )  s( p,  ) 
pi
pi

For High Skilled Workers:
Wh


  h N r ( p,  )  s( p,  ) 
pi
The Formal Model: The Effect of a
Change in the number of immigrants

For Capitalists

Wi  i ( pi , q) q
 r ( p,  )



  i N 
 s( p,  ) 

q

 

where

r ( p,  ) 


N

 r ( p,  )

Wl
q

 l
  l N 
 s( p,  ) 


 


For Labor

For Immigrants

For High Skill Workers

Wim
 r ( p,  )
 H (  )
q

  im
  im N 
 s( p,  )  



 


Wh
 r ( p,  )


  h N 
 s( p,  ) 

 

Extension 1 – firms can move, t=1



Firms are now allowed to move overseas
Move if  ( p , q,0)   ( p , q ,  )
New welfare function for the firm:
*
i
i
*
i



Wi ( p,  )   i   i ( pi , q,  )   i N r ( p,  )  s( p)
Extension 1 – Effects of Offshoring

For other capitalists:

For labor:

For immigrants: W
im
Wk  k ( pk , q,0) q

0
mi
q
mi
Wl
q

l  0
mi mi
mi

q
 im  0
mi

For high skilled workers, no direct effect.

For the government:
G
C W


0
mi mi mi
Extension 2 – Some firms have already
moved

Welfare change due to price increase in good i for capitalists in good i
who have moved
Wi  i ( pi , q,  )



  i N r ( p,  )  s( p,  )
pi
pi

For firms who produce good j overseas
W j



  j N r ( p,  )  s( p,  ) 
pi
Change in immigration
policy for firms that offshore

Wi
 r ( p,  )


  i N 
 s( p,  ) 

 
