Abstract
We examine the effects of tariffs in a two-country specific-factors model with endogenous illegal immigration. While tariffs generate the usual terms-of-trade gains in goods markets for the host country, they also raise wages and attract additional illegal immigration. Increased immigration-related costs and higher wage costs of hiring immigrants may reduce the welfare of citizens of the host country. We also show that within the context of our two-nation framework, free trade need not maximize joint welfare when illegal immigration and certain immigration-related costs are present. Finally, we analyze a sequential game in which the host nation announces a contingent tariff schedule to induce the source nation to adopt emigration-deterring border enforcement. Under a credible commitment mechanism, the host nation can achieve a free-trade equilibrium with lower illegal immigration and higher welfare compared with the baseline equilibrium without contingent tariffs.
Introduction
International trade is well understood to generate gains for participating nations through greater access to global markets. The other side of this coin is international movement of productive factors, such as labor and capital, which also confer gains by improving the global allocation of resources. International labor mobility, however, carries social and political implications for nations that go beyond pure allocative efficiency considerations. Rapid immigration into a rich host nation from a poorer source nation can entail economic and social adjustment costs (for both newcomers and incumbent residents), including challenges related to labor market integration and broader assimilation. Additional pressures may arise from congestion of publicly provided goods when population density increases and tax revenues do not scale up accordingly. Keeping such costs in mind and weighing them against benefits conferred by a productive immigrant workforce, nations calibrate their immigration policy, often through the use of quantitative entry limits or quotas.
Immigration quotas are typically country- and skill-specific, leaving large real wage differentials between higher-wage host nations (e.g., the United States) and lower-wage source nations (e.g., Mexico). These wage gaps create strong incentives for illegal immigration from the source nation to the host nation despite existing migration barriers. A central barrier is border protection measures by the host nation, but such measures can be costly for the host nation for both economic and non-economic reasons. This raises a broader theoretical question: Can trade policy, or the threat of trade policy, alter migration incentives and enforcement choices across countries? Recent experience with high levels of illegal immigration flows has prompted host nations to consider not only stronger border operations but also the use of tariffs as a means of inducing greater border enforcement cooperation from source nations. The U.S.-Mexico bilateral context is particularly relevant in this regard.
