Understanding the Immigrant–Trade Link
Chapter 2: The Gravity Model and the Literature on the Immigrant–Trade Link
2 The gravity model and the literature on the immigrant–trade link The Heckscher-Ohlin model of international trade, and specifically the Factor Price Equalization Theorem, provides a strong inference that international trade and immigration act as substitutes. If international migration is driven by economic considerations then large and persistent wage/earnings differentials between countries would provide an impetus for migration to occur. However, the Factor Price Equalization Theorem tells us that international trade operates to equalize the returns to homogenous factors of production across countries. If so, then international trade would potentially serve to reduce wage/earnings differentials and, thus, would discourage migration. Somewhat to the contrary, if international migration is largely driven by non-economic factors such as a desire to reunite with family members or to avoid persecution then the impact of trade on migration may be negligible. The prediction of substitutability between international trade and immigration in the Heckscher-Ohlin model follows largely from two of the model’s assumptions: (i) that factor inputs such as labor are immobile between countries (that is, no international migration) and (ii) that product and goods markets are perfectly competitive and, hence, that information is perfect (that is, complete and accurate) among all market participants. The ‘long-run’ nature of the Heckscher-Ohlin model renders it potentially inappropriate as a means to explain aspects of international trade that transpire over shorter time horizons. If we allow for international migration and imperfect information we are provided with a rationale for immigration and international trade to exist as complementary activities....
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