Trade, Migration, and Welfare: The Impact of Social Capital

Abstract

Despite the predictions of standard trade theory, countries in the North are not indifferent about free migration and free trade. Migration has become a major concern in some OECD (Organization for Economic Cooperation and Development) countries. But is migration really a threat? If free trade is optional, shouldn't free migration be optimal as well? Why do so many countries advocate free trade but [put]restrictions on international migration? Wellisch and Walz (1998) have shown that there is no inconsistency in advocating free trade at the same time as restricting migration under redistributive policies in the rich countries. The author argues that this holds in the presence of social capital as well. South-North migration affects social capital in both places. The movement of people differs from the movement of goods and services in that people create attachments with those with whom they share social capital (including norms, language, customs, values, and culture) and interact with them at lower cost. So migration generates externalities. The author identifies four types of externalities associated with migration. He examines the impact of trade and migration policies under alternative assumptions about internalizing these externalities and concludes that the South always gains by freeing trade and the North by controlling immigration. These policy recommendations improve the distribution of income by improving the welfare of labor relative to that of capital. Trade liberalization in the South results in higher wages (and social capital) and lower returns to capital. An immigration tax in the North has no impact on capital, but labor gains from collecting the tax (and from higher social capital).

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