Rebecca Freeman and John Lewis
Better communications, enhanced transport links, integration agreements between governments, and other factors have all helped increase global economic interconnectedness over the past few decades. Yet, comparing a state-of-the-art gravity model for trade versus migration reveals important differences in the evolution of globalization over time on flows of goods versus people. For trade, the boost from free trade agreements declines the farther apart signatories are, but for migration the boost increases with distance between signatories. Further, while both border and distance frictions have declined for trade over time, this is not the case for migration flows.
Globalization has many drivers and many consequences. Over the past decades innovations such as the internet, containerisation, the growth of air travel, better telecommunications, and improved transport infrastructure have all played a role (Freund and Weinhold (2004); Bernhofen et al (2016); Hummels (2007); and Sachs (2020)). In parallel, on the policy side, governments have enacted Regional Trade Agreements (RTAs) and Freedom of Movement Agreements (FMAs) to lower barriers to the movement of goods and people across borders, respectively. But whilst there are some common drivers and ‘globalization’ is often used as a catch-all term, it is not necessarily a uniform process which affects all cross-border flows in the same way or at the same speed. This poses important questions for policymakers and economists seeking to understand how the globalization process has reshaped trade and migration flows, such as:
- How does distance affect how RTA (FMA) policies boost trade (migration) between signatories?
- How has the drag of distance on each type of flow changed over time?
- How have border frictions for trade and migration flows changed over time?
On the trade side, empirical studies have long confirmed that RTAs boost trade flows between partners (see Limão (2016) for a survey). More recently, it has also come to light that the greatest boost to trade is likely to come from signing agreements with nearby partners (Baier et al (2018); and Freeman and Pienknagura (2018)), and that distance and border frictions have declined over time, fostering international trade flows (Bergstrand et al (2015)).
On the migration side, the literature is somewhat smaller, but has similarly found that FMAs boost migration between signatories (Bertoli and Fernández-Huertas Moraga (2015)). Further, Lewis and Swannell (2018) find evidence that the elasticity of distance declines under FMAs. But relatively little is known about the effects of distance and border frictions over time on migration, or the effect of distance on the total boost to migration flows associated with signing a FMA.
In recent work (Freeman and Lewis (2021)) we apply recent advances in gravity models to explore the questions above under a common econometric framework. By using an identical approach for trade and migration specifications, our analysis demonstrates that the important differences between trade and migration results in gravity models stem from underlying economic mechanisms rather than differences in estimator employed, functional form, control variables, or any other econometric feature.
The boost from RTAs is larger for closer signatories but the boost from FMAs is larger for more distant signatories
To answer the first question, we combine data on bilateral trade flows, RTAs, migration flows, FMAs, and distance for a set of 182 countries over years 1980–2014. Examining the interaction between distance and RTAs confirms the multiplicative nature of trade agreements and proximity. On the other hand, we find significant and increasing returns to FMAs with distance.
Using the estimated coefficients, we calculate the implied percentage boost to flows across the range of bilateral distances observed in our dataset (Chart 1). For RTAs, that boost declines with distance, falling relatively quickly at first. What might the economic mechanisms be? At shorter distances transport costs are low, so the distant-invariant costs (e.g. paperwork, delays at the border, etc.) account for a higher proportion of overall costs. Because RTAs act on the latter, they lead to a larger percentage reduction in trading costs when signatories are close together. Taking this to the data, Freeman and Pienknagura (2018) demonstrate that supply-chain activity, which is characterised by trade in intermediate goods, is the key channel through which RTAs create additional trade between closer signatories. Proximity plays a crucial role for just-in-time delivery and supply-chain development (Pisch 2020; and Conconi et al (2020)), so these trade flows are unlocked more by RTAs when distances between signatories are short.
Chart 1: Agreement effect by distance (km)
On the flip side, the boost to migration flows from FMAs increases with bilateral distance, rising relatively quickly at first. One possible explanation could be that FMAs help overcome distance-related search frictions because they permit individuals to migrate first, and then search for a job; whereas without an FMA moves are more likely to require a job offer first. In all likelihood, search frictions are greater over longer distances: it’s relatively easy for someone in Munich to cross the border and travel to Innsbruck for job-search activity, interviews, etc.; but far harder for a Londoner to do the same to look for work in Sydney. And so by eliminating the need to search from distance, FMAs have a larger effect for more distant signatories.
The falling drag of distance on trade flows over recent decades is not seen for migration flows
An important feature of our data is that we have information on both domestic trade and migration flows. Intuitively, this allows us to identify the changing role of distance on trade (migration) outcomes by allowing for an explicit consideration of the choice to produce for the domestic market (remain at home) versus exporting (emigrating) overseas.
To do so, we interact countries’ bilateral distance with time dummies, applying the method pioneered by Yotov (2012) when examining the distance puzzle for trade. Implementing this approach, we find an important difference between the role of distance on trade and migration flows over time (Chart 2).
Chart 2: Distance estimates by year
Distance has a negative impact on both bilateral trade and migration flows, i.e. distant countries trade less with one another and further distances hinder migration.
Thus, when the (blue) trade line rises, this means that the overall distance effect becomes less negative over time. That is, distance is exerting a progressively smaller drag on trade over time. The intuitive explanation for this result is that improvements in transport and communications have lowered the marginal costs of trading at an extra kilometer of distance.
For migration (crimson line) the puzzle remains as stark as ever. One might have expected these developments to have had a similar effect—in direction if not size—on migration flows, but three and half decades of globalization have seemingly not led to any discernible fall in distance frictions for migration. To the extent that technological advances have made it easier to search for employment (e.g. through online job platforms) and travel abroad (e.g. via easy access to air travel and high-speed rail), this result is a puzzle.
Border effects have declined for trade, but not for migration
In the same vein, we investigate how international border frictions have changed over time for each type of flow. Simply put, we do this by interacting a dummy variable for cross-border (as opposed to domestic) flows with time, in a similar way to the distance exercise above. Chart 3 shows the results.
Chart 3: Border estimates by year
Borders have a negative effect on international (relative to domestic) trade and migration flows, so a rising line indicates the friction imposed by borders is getting smaller over time.
For trade (blue) we see that border frictions have consistently declined over time. This seems consistent with the overall stylised fact that trade flows have increased relative to GDP, in large part as a result of broad-scale reductions in policy barriers and technological advancements (Antràs (2020)).
For migration on the other hand (crimson) there has been no discernible change. Interestingly, the above result for migration is consistent with the equivalent stylised fact: an array of papers have found that migration outflows have not risen relative to population (Abel and Cohen (2019); and Lowell (2007)). In that sense, the constant border friction result is consistent with that stylised fact, but raises a broader question about the underlying cause for this migration trend.
The literature using gravity models to understand trade flows is more voluminous and more developed than the corresponding body of work for migration. Applying recent advances in gravity models of trade to migration, we highlight that the process of globalization appears to have reshaped trade and migration flows in markedly different ways over the past several decades, even though evolutions in some of the underlying factors shaping such flows (communication, transport, etc.) have been similar. For trade, the key results that the drag of distance and border frictions on flows of goods have declined over time seem to have a fairly straightforward explanation. But for migration, we do not find such an effect. While the border result is line with aggregate migration flows being relatively stable compared to population, there is still an open question as to why this trend has persisted. The result on distance remains a puzzle.
Rebecca Freeman works in the Bank’s Global Analysis Division and John Lewis works in the Bank’s Research Hub.
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