Revisiting the Trade-Migration Nexus: Evidence from New OECD Data

Abstract

International migrants contribute to bilateral trade creation if their presence reduces trade costs or entails additional demand for goods from their source countries. However, only the trade-cost channel matters for beneficial welfare gains from migration. Using new data on stocks of foreign-born individuals by skill class, we try to separately quantify those two channels. We assume that improved information affects host countries' imports and exports symmetrically, while the preference channel matters for imports only. For differentiated goods, both channels contribute evenly towards the total trade-creating effect of migration. Hence, looking at the total trade-creating effect of migration substantially overestimates the welfare gains. In line with expectations, the trade cost channel - and hence the efficiency effect - is largest with differentiated goods and for high-skilled migrants.