Trading Goods or Human Capital: The Gains and Losses from Economic Integration

AuthorMichał Burzyński
DOIhttp://doi.org/10.1111/sjoe.12230
Publication Date01 Apr 2018
©The editors of The Scandinavian Journal of Economics 2017.
Scand. J. of Economics 120(2), 503–536, 2018
DOI: 10.1111/sjoe.12230
Trading Goods or Human Capital:
The Gains and Losses from Economic
Integration*
Michał Burzy´nski
CREA, University of Luxembourg, L-1511 Luxembourg-Limpertsberg, Luxembourg
michal.burzynski@uni.lu
Abstract
In this paper, I quantify the economic consequences of liberalizing migration in the
OECD and compare them with those of a hypothetical liberalization of trade across
the OECD. First, I investigate the bilateral migration and trade agreements between
the EU and Australia, Canada, Japan, Turkey, and the US. Second, I show that the
overall impact of reducing all legal restrictions on migration in the OECD is moderate
(1.6 percent in real GDP), while the gains from removing tariff and non-tariff barriers
to trade among all of the OECD economies are slightly lower (1.1 percent in real
GDP). Finally, both the theoretical and numerical findings suggest that the direction
of relationships between trade and migration (either substitutability or complementarity)
depends on the type of shock imposed in the system.
Keywords: Computational general equilibrium; globalization; international trade; migration
JEL classification:C68; F22; J24
I. Introduction
The members of the Organisation for Economic Co-operation and
Development (OECD) constitute one of the world’s most integrated
economic systems. Despite this fact, reducing the legal barriers for goods
and population mobility, at the regional and global levels, is an issue that
is currently being negotiated within political and economic forums. Both
decision-makers and scientists are discussing intensively the possibility
of implementing policies that would deepen the consolidation of OECD
economic areas in terms of labour movement and international trade. In
this paper, I provide quantitative arguments for this debate. I investigate
the economic consequences of a hypothetical partial and full economic
*I am g rateful to Fr´ed ´eric Docquier, Francesco di Comite, Jakub Growiec, Witold Jurek,
Jo¨el Machado, Krzysztof Malaga, Fabio Mariani, Christopher Parsons, Luca Pensieroso, and
Chrysovalantis Vasilakis for all helpful comments and suggestions. This paper is a part of my
PhD thesis written at IRES, Universit´e catholique de Louvain. The research was financed by
the Polish Ministry of Higher Education and Science (Mobility Plus program) and the FNRS,
Belgium.
504 Trading goods or human capital
integration among the OECD countries, understood as removing the
formal visa barriers for international migration, and tariff and non-tariff
restrictions for international trade.
Many political and economic actions have already been undertaken
to facilitate the international flows of goods. As early as in 1960,
the European Free Trade Agreement was established by the Western-
European nations. This path-breaking treaty encouraged other authorities to
develop local trade agreements and to strengthen the regional integration
of economies. On the contrary, multi-country free-migration unions are
rare (apart from the EU states or the bilateral Australia–New Zealand
treaty), which indicates that reducing the costs of migration is not a
commonly preferred policy. Today, during the ongoing discussions about
the liberalization of trade and capital flows (and, possibly in the future,
migration) between the EU and other major partners (Canada, Japan,
Turkey or the US), the question of gains from abandoning the legal trade
(and migration) barriers is being reinvestigated. In fact, in 2014, the EU
concluded the dialogue on a vital agreement with Canada, which removes
tariff and non-tariff barriers to trade for more than 99 percent of products.
Simultaneously, intensive bilateral negotiations with Japan, Turkey, and the
US give rise to the expectation that consecutive treaties would be signed in
the future.1Turkey is the only non-EU country that is involved in bilateral
discussions concerning the elimination of visa barriers.2The body of
academic literature on the evaluation of the proposed trade and migration
policies is limited, suggesting that the arguments for or against entering
into particular partnerships are more political rather than economic. In
this paper, I try to fill this research gap by providing an assessment of
economic consequences of international agreements, using a multi-country
model of migration and trade.
The research questions that I address in this paper oscillate around
analysing the economic effects of liberalizing migration and trade. My
main goal is a quantitative assessment of a hypothetical reduction of
formal visa restrictions across the OECD, relative to the potential gains
from removing tariff and non-tariff barriers among the OECD countries.
According to the current political strategy of the EU, I shall consider
the scenarios of regional migration and trade agreements between the
EU and five potential partners (Australia, Canada, Japan, Turkey, and the
1Details on the currently negotiated agreements between the EU and all of the
partners mentioned in this paper can be found on the European Commission’s web site
(https://ec.europa.eu/commission/index en).
2The document called “Road map towards a visa-free regimewith Turkey” was publishedon the
European Commission’s web site (https://ec.europa.eu/home-affairs/sites/homeaffairs/files/
what-is-new/news/news/docs/20131216-roadmap towards the visa-free regime with turkey
en.pdf).
©The editors of The Scandinavian Journal of Economics 2017.
M. Burzy´nski 505
US). Several simulations are run to assess the economic implications for
the natives living in Europe and in the partner countries. The results of
these exercises show that preferential trade agreements have a moderate
impact on the macroeconomic performance of the European economies.
Furthermore, they are mutually beneficial for both partners. By contrast,
a liberalization of migration barriers induces more visible effects, which
are positive for destinations (namely, Australia, Canada, and the US) and
harmful for origin countries (that is, Turkey and, to a lesser extent, Japan).
The gains from migration are exclusive, which implies that in some cases,
the natives in the EU might lose significantly.
Another scenario assumes the elimination of visas and tariff and non-
tariff barriers among all of the OECD economies. Interestingly, the
results demonstrate that the first policy produces substantially positive
consequences for only a few states, whereas a full liberalization of trade
is advantageous for all OECD members.3However, on the aggregate,
migration liberalization has once again stronger effects than the intra-
OECD free-trade agreement. Assuming the benchmark parametrization,
the former scenario brings an aggregate gain of 1.6 percent in terms
of the real gross domestic product (GDP) of the OECD, whereas the
latter increases real GDP by 1.1 percent. The main conclusion from these
exercises can be summarized as follows. The removal of legal barriers
to migration and trade among the OECD countries has roughly similar
aggregated economic effects, but has various distributive consequences
for the particular states. Moreover, a shock imposed on one phenomenon
causes an endogenous reaction of the other.
This paper differs from the previous studies in several aspects. To
quantify and compare the effects of hypothetical liberalization policies, a
general equilibrium model is proposed. I assume endogenous migration and
trade among 34 OECD countries and the rest of the world, heterogeneous
labour (low/highly skilled and domestic/foreign workers), and homogeneous
firms within a given country. In the simulations, the wages, prices, trade
and migration flows, and the masses of varieties are endogenized. I base
my analysis on the approach towards modelling international trade, inspired
by Di Giovanni et al. (2015) and developed in Aubry et al. (2016).
Global flows of migrants are described using a random utility model
in the spirit of McFadden (1984), which was implemented for a global
economy by Docquier et al. (2015). The proposed framework enables me
to conduct an analysis of various liberalization policies concerning both
international trade and migration. The novelty of this approach consists of
the possibility of comparing the relative magnitudes of both phenomena
3The gains in real wages above 1 percent are obtained for Australia, Canada, New Zealand,
Switzerland, and the US. Mexico loses more than 3 percent.
©The editors of The Scandinavian Journal of Economics 2017.

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