Immigration and International Trade: A Semiparametric Empirical Investigation

Abstract

This paper examines the effect of immigration on the US trade flows. The model hypothesizes that immigration facilitates international trade with home countries by lowering transaction costs. Immigrants also demand products from their country of origin and thus stimulate trade. Using a panel data set we estimate a dynamic semiparametric fixed-effect model. The immigrant stock, a proxy for transaction costs, enters the model non-parametrically, whereas other variables enter the model log-linearly, as implied by the gravity model of international trade. To estimate this semiparametric model, we develop a new instrumental variable estimator with desirable asymptotic properties. The results indicate that the immigration effect on imports is positive for both finished and intermediate goods, but the effect on exports is positive only for finished goods. The findings supports the hypothesis that for finished goods where country specific information is crucial for trading, immigrants have a pro trade effect for both US imports and US exports. This pro trade effect of the information and knowledge carried by the immigrants is not observed for the US exports in the intermediate goods. Immigrants also have a strong demand effect both for the consumer and intermediate imports.