Liberalized immigration as free trade: economic welfare and the optimal immigration policy.

• Author: Chang, Howard F.

Introduction

I. National Economic Welfare

1. Effects of Immigration Through the Labor Market

2. External Effects of Immigration

3. The Optimal Tariff on Unskilled Immigrants

4. The Optimal Tariff on Skilled Immigrants

5. Immigration of Nuclear Families

6. Future Generations

7. Avoiding External Costs

8. Unemployment

   I. Constitutional Law

10. Citizenship, Guestworkers, and Illegal Immigration

11. Family-Based Immigration as a Negative Tariff

    L. Distributive Justice

13. Preferences for the Ethnic Status Quo II. Concern of the Welfare of Immigrants

1. The Optimal Tariff

2. The Optimal Quota

3. The Optimal Allocation of Visas Subject to Quotas III. Global Economic Welfare

1. Effects in the Global Labor Market

2. External Effects

3. Optimal Fiscal Policies

4. Optimal Quotas IV. Conclusions

   Introduction

   Since multilateral trade negotiations produced the General Agreement on Tariffs and Trade ("GATT")(1) in Geneva in 1947, the world has made dramatic progress toward free trade in goods. Several subsequent rounds of negotiations under GATT have steadily liberalized international trade, and numerous regional initiatives seek to deepen economic integration among countries prepared to go further. Standard economic theory prescribes free trade as the regime that maximizes global economic welfare. Economists also recommend trade liberalization as a policy that is likely to produce gains for each country.

   The gains from trade will arise from the fact that different countries will produce various goods at different costs. When countries restrict trade, the price of a good will be low in countries that can produce the good at low cost, but its price will be high in countries that can produce the good only at higher cost. Liberalized trade allows both countries to gain. The high-price country can import the good at a price lower than the cost of producing the good at home; the low-price country can export the good and receive a higher price than it would otherwise fetch.

   Precisely the same theory applied to trade in goods also applies to trade in services. The Uruguay Round of trade negotiations recognized this fact in 1994, extending the international regulation of trade to service markets through the General Agreement on Trade in Services ("GATS").(2) Free trade in all services, including labor services, would imply free movement of people across borders. To provide many services, workers must cross borders to where the work must be performed, either on a temporary basis or to accept permanent employment.(3) Thus, the free movement of workers across borders promotes economic welfare by promoting free trade in the labor market.(4) The European Union recognizes the importance of free mobility of labor as an element of a comprehensive free trade regime, enshrining this freedom in its constitution as one of the "four freedoms" that are the basic pillars of the European common market, "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured."(5) This "freedom of movement for workers" in turn entails "the abolition of any discrimination based on nationality between workers. . . with respect to employment."(6)

   Immigration barriers interfere with the free flow of labor internationally and thereby cause wage rates for the same class of labor to diverge widely among different countries. For any given class of labor, residents of high-wage countries could gain by employing more immigrant labor, and residents of low-wage countries could gain by selling more of their labor to employers in high-wage countries. Given the large international differences in wages, it should be apparent that the potential gains from international trade in labor (and the costs we bear as a result of immigration barriers) are large.(7)

   Indeed, studies suggest that the gains to the world economy from removing immigration barriers could well be enormous and greatly exceed the gains from removing trade barriers. For example, Bob Hamilton and John Whalley provide estimates that suggest that the gains from free migration of labor would more than double worldwide real income, indicating that immigration controls "are one of the (and perhaps the) most important policy issues facing the global economy."(8) Even their most conservative estimate suggests that the gains would be a significant fraction (over thirteen percent) of worldwide real income.(9) Furthermore, their analysis indicates that the free migration of labor would also greatly improve the global distribution of income by raising real wages dramatically for the world's poorest workers.(10)

   Recognizing the importance of immigration barriers as costly trade barriers, developing countries, especially India, have pressed for liberalized movement of labor as part of the liberalization of world trade in services. India, with the support of the Philippines, Egypt, Brazil, and Pakistan, has threatened to block progress on the liberalization of trade in financial services in the absence of progress on the "movement of natural persons," which is the subject of a parallel set of negotiations in the World Trade Organization ("WTO").(11) In spite of the large efficiency gains that liberalized immigration policies would produce, however, the authors of the GATS were careful to avoid imposing any obligations with respect to immigration policies.(12) Similarly, in negotiating the North American Free Trade Agreement ("NAFTA"),(13) the United States refused to discuss the liberalization of labor movement as an element of free trade.(14)

   Indeed, in 1995 the U.S. Commission on Immigration Reform, headed by Barbara Jordan, urged Congress to move radically in the opposite direction, toward more restrictive immigration laws.(15) The Jordan Commission recommended sweeping changes in longstanding U.S. immigration laws, including a reduction in the overall level of legal immigration into the United States by one-third.(16) The proposed changes included permanent cuts in both employment-based and family-based immigration.(17) These proposals would entail the most restrictive changes in U.S. immigration law since immigration quotas were first introduced in 1921.(18) President Clinton immediately endorsed these proposals.(19) Senator Alan Simpson and Representative Lamar Smith, both Republicans, soon introduced bills to implement the Jordan Commission's recommendations.(20) With public opinion polls indicating that most voters believe that current immigration levels are excessive,(21) many observers predicted that these bills would pass with bipartisan support. These radical cuts in legal immigration proved controversial, however, and after heated debate, both the House of Representatives and the Senate ultimately voted to exclude these cuts from their immigration reform bills.(22) Observers expect restrictionists to revive these proposals in the near future.(23) Yet, as Commissioner Warren Leiden observed in his statement dissenting from the Jordan Commission's proposal to reduce legal immigration, the Commission "can provide no convincing argument for this drastic reduction" because "there is no objective basis for a drastic reduction."(24)

   In fact, as this Article will show, the application of trade principles to immigration law suggests instead that specific liberalizing reforms, which are likely to increase levels of employment-based and family-based immigration by eliminating certain immigration barriers, would raise national economic welfare as well as global economic welfare. In particular, this Article will begin with a focus on immigration for the purpose of employment, although the analysis will have implications for immigration in general. Employment-based immigration is largely justified on economic grounds, unlike refugee or family-based immigration, which raise other issues such as humanitarian considerations. I will turn to these other categories of immigration, however, as they become relevant to the analysis. I will use the term "immigration" in a broad sense, including not only the admission of aliens for permanent residence (on "immigrant" visas) but also the admission of guestworkers on a more temporary basis (on what are called "nonimmigrant" visas in the United States).(25) Thus, I will focus on the issue of admission to the labor market of the host country, which does not necessarily imply access to citizenship in the host country. Given the importance of economic concerns in the public debate over immigration policy, I will focus on the implications of immigration for economic welfare, but I will also touch upon some noneconomic concerns as they relate to the economic analysis.(26) Although my economic analysis applies to any country of immigration, my focus will be on the United States, and I will derive policy implications for the United States in particular.

   Before reaching any conclusions regarding the optimal level of immigration, one must specify the criterion by which one will evaluate the effects of immigration. To shed light on our immigration laws, I will explore what policies would be optimal from the perspective of economic welfare. In evaluating the effects of immigration policies upon economic welfare, however, we must first address the question of whose welfare we are considering. Should we seek to maximize the welfare of natives alone, or does the welfare of immigrants count as well? Should we seek to maximize national economic welfare or global economic welfare? Once we decide whose welfare counts, we must also address whether our objective is merely to maximize their wealth (that is, to pursue economic efficiency with respect to their welfare) or whether our objectives also include an equitable distribution of wealth among them. If our objectives include distributive concerns, then our measure of social welfare must specify how much weight to give these concerns. We might adopt a utilitarian measure of social welfare, which would imply one...