Are international trade and migration complements or substitutes?

As migrants move from their origin country to a destination country, does that result in increased trade as well as migration? Intuitively, it seems like it would. In the simplest sense, those migrants might send goods back to family and friends at home in the origin country, and they might import goods from the home country to their destination. Causality need not run from migration to trade though. People are more likely to migrate to places that they are more familiar with, and having experienced goods from a country might increase familiarity with it - a mechanism leading from trade to migration. Either way, those explanations would suggest that international trade and migration are complements - an increase in one is associated with an increase in the other. However, the international literature has been inconsistent in its findings. Some studies find that trade and migration are complements, while other studies find that they are substitutes - an increase in trade is associated with a decrease in migration, and vice versa.

In a new working paper, my PhD student Rosmaiza Abdul Ghani and I, along with Bill Cochrane (University of Waikato) and Matthew Roskruge (Massey University) use a newly available migration dataset, along with longstanding trade flows data, to investigate these relationships. Most studies of migration and trade limit themselves to a few countries, or use migrant stocks (the number of migrants living in a particular country) as a proxy for migration. However, this dataset by Nikola Sander and Guy Abel covers migration flows between over 240 countries. And it comes with cool graphics (try them at this link).

Anyway, that data allows us to investigate the relationships between trade and migration more thoroughly than previous studies. We make use of seemingly unrelated regression, which is a technique that allows us to simultaneously model the relationships that run in both directions. We found that:

...trade and migration have positive coefficients in all of the specifications except for the fixed effects model (where, as noted above, the interpretation of the coefficients is challenging). That is, trade and migration are complements. In our preferred PPML-SUR specification, an additional migrant from country i to country j is associated with 1.7 percent higher trade flows from country i to country j, while an additional USD1000 in trade flows from country i to country j is associated with 25.4 percent higher migration flows from country i to country j.

The second of those coefficients seems a little large, but it starts from a very low base - perhaps we should have re-centered the data. In any case, the results support the story I noted at the beginning of this post - international trade and migration are positively related, so they are complements. This analysis is correlational though - we haven't established any causality here. That is the subject of the second paper contributing to Rosmaiza's PhD, which I'll blog about in a future post.