Topic: Trade and Immigration

Smoke on Your Pipe and Put That In!

Harvard economist George Borjas, perhaps the leading academic skeptic of increased immigration, has started a blog. In a West Side Story-themed post this morning, Borjas argues that the failure of Puerto Rico’s per capita GDP to converge fully with the United States’, despite the fact that the flow of people and capital between the two countries is completely unrestricted, challenges the idea that a liberal migration policy can make people in the developing world better off.

There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the “long run,” maybe Keynes was right after all.

The fact that migration entails very high costs if an important–and often ignored–part of the economics of migration. The fact that wages don’t equalize even when a “country” loses a large chunk of its population and there are unrestricted capital flows is both interesting and important. It should give some food for thought to those who view migration as a policy tool that can help alleviate many of the developing world’s problems.

I think this is misleading. Mississippi, the U.S.’s poorest state, has a per capita gross state product of about $28,000 per person, which is not quite 2/3 of the overall U.S. per capita GDP, $43,500. The relevant comparison would seem to be the per capita GDP of Puerto Rico next to that of other Caribbean islands. Puerto Rico’s PPP-adjusted GDP per capita for 2006 was about $19,000.

First, it should be pointed out that the U.S. Virgin Islands, whose inhabitants have been U.S. citizens since 1927, does even less well, at about $14,500 per capita. (That’s a 2004 number, so it’s probably a bit higher than that.) But this isn’t a very good comparison, either; the Virgin Islands has a population slightly bigger than Davenport, Iowa, the economy basically runs on tourism, and the people who own the resorts don’t live there. Cuba, with a population about three times Puerto Rico’s, comes in with a GDP per capita of around $3900, less than a quarter of Puerto Rico’s. But we already knew that communism is terrible. The best comparison is probably the nearby Dominican Republic, which is neither a socialist dystopia nor a U.S. territory. GDP per capita in the Dominican Republic is $8000, less than half Puerto Rico’s.

But who cares about Puerto Rico, the territorial jurisidiction? How are Puerto Ricans doing? According to Wikipedia’s entry on Puerto Ricans in the United States, slightly more Puerto Ricans now live Stateside than on the island, and, “in 2002, the average individual income for Stateside Puerto Ricans was $33,927.”

I find it pretty hard to see this as anything less than a slam dunk for the humanitarian benefit of the freedom of movement.

On a more technical note, why would one really expect wages to fully equalize in the absence of the idealized conditions of the economic model? First, there’s the obvious fact that an island in the Caribbean is “off the grid” of the main U.S. trade infrastructure. Second, as Borjas points out, there is a high cost to immigration. Those able to foot the bill are likely the most productive workers with the greatest capacity to save. And those with higher levels of skill are likely to see a bigger relative returns from participation with U.S. labor markets, reinforcing the incentive for the more skilled to move. If that’s true, and Puerto Rico has lost disproportionately many higher-skilled workers to the U.S., then the fact that GDP per capita is still so high compared to neighboring democracies is really a slam dunk.

To drive the point home, a fun quotation from the the CIA World Factbook entry on the Dominican Republic:

Haitian migrants cross the porous border into the Dominican Republic to find work; illegal migrants from the Dominican Republic cross the Mona Passage each year to Puerto Rico to find better work.

And Puerto Ricans who can afford it “like to be in America.”

[Lyrics to Bernstein and Sondheim’s “America” here.]

A Rising Tide Lifts all Boats

Kennedy was right. Not Teddy Kennedy, of course, but his brother. President John F. Kennedy stated that a rising tide of economic growth generated benefits for all. A new study from the Congressional Budget Office looks at income trends for families with children and confirms JFK’s wisdom. The Wall Street Journal reviews the key findings:

A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991. The CBO results don’t fit the prevailing media stereotype of the U.S. economy as a richer take all affair – which may explain why you haven’t read about them. … The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s. … CBO says … earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market. … earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon. … The report also rebuts the claim, fashionable in some precincts on CNN, that the middle class is losing ground. … every class saw significant gains in income. … the CBO study found that, with the exception of chronically poor families who have no breadwinner, low-income job holders are climbing the income ladder. When CBO examined surveys of the same poor families over a two year period, 2001-2003, it found that “the average income for those households increased by nearly 45%.” That’s especially impressive considering that those were two of the weakest years for economic growth across the 15 years of the larger study.

A Good Start on Immigration Reform

Today, the Senate begins debating a comprehensive immigration reform bill. The compromise bill announced last week is not perfect, but it offers a reasonable opportunity to reduce illegal immigration, secure our borders, and keep our economy growing.

The key to successful immigration reform, as I argued just last week in a new Free Trade Bulletin, is a workable temporary worker program. The compromise would allow 400,000 temporary workers to enter the country each year on “Y visas” to fill a multitude of jobs for which there simply are not enough native-born Americans available. We know from experience with the Bracero program in the 1950s that if we expand the legal opportunities for foreign-born workers to come to the United States, illegal immigration will drop.

The bill also legalizes most of the 12 million people currently in the country illegally by granting them temporary, renewable “Z visas.” Opponents will call any legalization an amnesty, but the compromise provisions would exact a $5,000 fine―not chump change for a low skilled worker―while requiring them to return to their home country before applying for permanent legal status. Permanent status would only be granted after the government clears the backlog of immigration petitions already outstanding, a process that will take about eight years. This is a far less generous legalization than what was offered in the 1986 Immigration Reform and Control Act, which handed immediate green cards to about 2.7 million previously illegal immigrants.

The bill would also shift the emphasis on immigration from family relationships to a broader list of factors, including education, English proficiency, and work experience. The bill would still allow family visas for spouses and minor children, but being the parent, sibling and grown child of a naturalized U.S. citizen would not longer be sufficient qualification.

This provision is drawing flak from a number of immigration supporters, but the shift away from a family-dominated immigration system makes sense. It is easier today than it was a century ago to maintain ties to extended family because of international travel and international telecommunications. Although I believe fears of “chain migration” are over-blown, this compromise would help to alleviate some of those fears among people who would otherwise support immigration reform.

Any legalization would be put on hold until certain quantifiable “triggers” are met. The requirements include beefing up the border patrol to 18,000 agents, erecting a 370-mile fence along the U.S.-Mexican border, and expanding detention facilities to hold up to 27,500 illegal aliens per day.

My concern with the triggers is that they will needlessly delay the single most important remedy for illegal immigration―a temporary visa program for new workers. The problem of illegal immigration exists because our immigration system is out of step with the realities of the American labor market. As Homeland Security Secretary Michael Chertoff testified before Congress in February, a legalization program would significantly reduce illegal traffic across the border, enhancing the ability of U.S. agents to capture people who would still be sneaking in to commit criminal or terrorist acts.

The bill also requires a nationwide employment verification program covering every U.S. worker, whether native or foreign-born. This is also troubling. An existing pilot program has exposed a disturbingly high error rate. U.S. citizens have been rejected by the system, requiring them to visit with immigration officials to prove their legal status. I doubt many native-born Americans will want to entrust their ability to earn a living to the reliability of a centrally controlled government data base.

These are kinks that can and should be worked out in the legislative process unfolding as we speak. Despite its shortcomings, the immigration reform plan unveiled last week and now before the Senate contains all the essential elements to finally address the growing problem of illegal immigration.

That Mobile Line in the Sand

In a recent post and in this Washington Times commentary today, I note that there is less than meets the eye with respect to last week’s “grand deal” to include labor and environmental provisions in trade agreements reached between congressional Democrats and the White House.  (That’s not to say its unimportant — it is significant, and also regrettable).

One of my points (implicit as it may be) is that caving on labor and the environment would not be enough to warm Congress to the benefits of trade liberalization.  What was pitched to the press as the final price to win Congressional support for the administration’s trade agenda was merely the admission fee.  More demands would be forthcoming.

Alas, today members of Congress (22 Ds, including the trade leadership and 20 Rs) petitioned the U.S. Trade Representative to launch a Section 301 investigation into Chinese currency manipulation.  The petition is touted as “one last chance” for the Bush administration to act on the currency manipulation issue before legislation effectively mandating that conclusion, along with sanctions, is moved in Congress.

I can already see the words of Ways and Means trade subcommittee chairman Sander Levin (D-MI) when the USTR turns down today’s 301 petition.  “How can any member of Congress in his right mind vote to support any more trade agreements when this administration is unwilling to stand up for the working men and women of America?”

Of the four pending bilateral trade agreements (Korea, Colombia, Peru, and Panama), I’m betting exactly none will become reality during this presidency and beyond.

Anti-trade Demagoguery from the Eagle Forum

I’m occasionally asked, “If the case for free trade is so solid, why don’t more people agree with it?”  One reason is that it is so much easier to demagogue international trade than it is to explain it.

For example, consider a column posted this morning by Phyllis Schlafly, president of the Eagle Forum. Mrs. Schlafly is a social conservative known mostly for her opposition to abortion and the Equal Rights Amendment, but she also speaks out frequently against immigration and free trade.

In today’s column, titled “The Price Of Imported Food Is Too High,” she takes aim at trade with China, and in particular trade in agricultural goods.

The Clinton Administration conned American farmers into being the principal lobbyists in 2000 for passage of PNTR (Permanent Normal Trade Relations) for Communist China, which gave Chinese goods unconditional access to U.S. markets.

Bill Clinton promised in his State of the Union address that PNTR for China would be a win-win for American agriculture because “this agreement will open China’s market to us.” His Department of Agriculture predicted that the average annual value of U.S. agricultural exports to China would increase by $1.5 billion.

Globalization turned out to be a cheat. Department of Commerce figures show that U.S. wheat exports to China are less today than before PNTR was passed.

Consider the facts on U.S. farm exports to China. Since 2001, when we made normal trade relations with China permanent, U.S. agricultural exports to China have grown from $2.1 billion to $7.2 billion–an increase of more than $5 billion. Our export of soybeans alone has increased by $1.5 billion, raw cotton by almost $2 billion. Wheat exports, in contrast, make up a small and declining share of our total agricultural sales to China. 

Mrs. Schlafly goes on to rail against tainted pet food recently imported form China. “Maybe China’s poisoning of our pets will be one offense too many to tolerate,” she concludes. 

Food safety is not primarily a problem of imports. Americans have been poisoned recently by meat from Nebraska and spinach from California. The answer is better safety inspections for domestic and imported food alike, not higher tariffs on imports. If we tax imported food, we would merely drive up food costs for American families, especially those on tight budgets who spend a higher share of their income on food. 

It’s regrettable that an organization dedicated to upholding moral and family values would put out such misleading material in effect arguing for higher food costs for millions of American families. 

U.S. Trade Policy, R.I.P.

The NY Times, Washington Post, and other major media outlets have been gushing praise upon congressional Democrats and the Bush administration for hammering out a deal that keeps the trade agenda alive.  Lending some credibility to those media perspectives, which are too often misinformed and misleading, are assessments from knowledgeable, respected trade policy scholars that the compromise deal struck last week does in fact constitute a major breakthrough.

In my view, only analytical laziness or low expectations about the capacity of the administration and Congress to agree on anything related to trade, or sheer desperation for a sign of progress could produce a thumbs-up assessment of last week’s deal.  The proper interpretation is this:

U.S. trade policy, RIP.  Here’s why.

There are four concluded bilateral trade agreements (with Korea, Colombia, Peru, and Panama) awaiting congressional approval.  There is the seriously stalled Doha Round of multilateral trade negotiations, which has been the elusive grand prize of trade policy during the Bush years.  And there is the June 30 expiration of Trade Promotion Authority, which enables the executive branch to negotiate agreements (that must also reflect the wishes of Congress as of 2002, when TPA was passed into law) and bring them back to the Congress for an up-or-down vote.  Without TPA, agreements would be undone, reconfigured, and made unrecognizable and ultimately unacceptable, as 535 congressional tinkerers got their hands on them.

The TPA 2002 language was silent about environmental provisions and specified that trade partners should be required to enforce the labor laws on their books.  The new Democratic Congress finds the TPA 2002 language unacceptable.   Trade deals must contain strict, enforceable labor and environmental provisions, if they are to win the support of the Democratic caucus – so they say. 

The agreement struck last week is akin to a supplemental to the TPA 2002 bill.  It doesn’t extend TPA beyond June 30, but it imposes additional conditions with which trade agreements must comport.  The administration agreed to the terms because, well, it had no choice!  The labor unions, which now dictate congressional trade policy, are unwilling to support trade liberalization.  The administration has nothing, absolutely nothing, with which to compromise.  Thus, by agreeing to last week’s terms, the U.S. Trade Representative is throwing a Hail Mary.  Trade policy will not advance without those terms, and there’s a remote change it could advance with them.  The problem is that it won’t.

Arguably, the left-of-center press is giddy about the fact that Congress compelled the Bush administration to agree to include strict, enforceable labor and environmental provisions in prospective trade agreements (There was more to the deal, but labor and environmental standards were the big issues).  It matters not to the ubersanctimonious of the media that if you’re really concerned about environmental quality and working standards in poor countries you should seek to remove (not create) conditions on investment inflows.  Oh well, at least they’ve acknowledged the plight of poverty. 

But they should also remember that just because two branches of the U.S. government agree to these provisions doesn’t mean our trade partners will.  With a few relatively minor exceptions, they won’t.

In 1996, WTO trade ministers at the conclusion of their first biannual meeting in
Singapore issued a strong statement of consensus on the issue of labor standards.  The statement declared support for core labor standards, but opposed the idea of enforceable labor provisions in trade agreements.  Standards are promoted by “economic growth and development fostered by international trade and further trade liberalization,” the statement read.  Imposing conditions on trade and investment with poor countries only slows economic growth, which prevents labor standards from rising, was the gist of the statement.

Today, the WTO comprises even more developing countries than in 1996.  Their position against enforceable labor standards is even more entrenched.  They don’t oppose better local labor and environmental conditions, but fear that rich countries will use those provisions as a fig leaf to achieve protectionist outcomes.  The legitimate concern is that the potential to allege labor or environmental violations, regardless of merit, will deter foreign investment in local factories and in other areas of the local economy, which is the real key to raising standards.

Thus, despite suggestions that the last week’s deal opens up the door to continued progress on Doha, reality is quite different.  The United States has only introduced another obstacle that will calcify the current North-South divide in the Doha negotiations.

There is a remote possibility that the agreements with Peru and Panama will come to fruition.  Both of those governments are vested heavily in a successful trade deal with the United States, so they may be inclined to bite the bullet.  It remains to be seen, however, if the Peruvian and Panamanian legislatures will approve the new terms.  And quite frankly, there is absolutely no guarantee that Democrats in the U.S. Congress will support these deals despite last week’s ballyhooed “breakthrough.”

Indeed, the Colombian deal has been identified as still problematic by the congressional leadership.  In a letter to the USTR last week, House Ways and Means Chairman Charles Rangel (D-NY) wrote that the Colombia agreement can not be supported by Democrats unless the Bogota government does a better job finding and punishing violent criminals.  And House Ways and Means Trade Subcommittee Chairman Sander Levin (D-MI) is actively opposing the Korea agreement since it doesn’t include his proposal to condition Korean access to the U.S. auto market on the success of U.S. auto sales in Korea.

Although the Democratic leadership has been asserting that its caucus would support trade liberalization if its positions on labor and the environment were accommodated, it appears their bluff has been called.  Opposition to Colombia and Korea has nothing to do with labor and environmental standards.  It has everything to do with union opposition to trade, period.

And without labor’s nod, Democrats will not support trade in sufficient numbers to keep U.S. trade policy on track. 

Thus, trade policy, RIP.

Spain: Immigration Up, Unemployment Down

The recent economic success of Spain has not received the attention it deserves. One element in Spain’s resurgence, which I didn’t previously know about, is a relatively liberal immigration policy. According to BusinessWeek:

Over the past decade, the traditionally homogeneous country has become a sort of open-door laboratory on immigration. Spain has absorbed more than 3 million foreigners from places as diverse as Romania, Morocco, and South America. More than 11% of the country’s 44 million residents are now foreign-born, one of the highest proportions in Europe. With hundreds of thousands more arriving each year, Spain could soon reach the U.S. rate of 12.9%.

And it doesn’t seem to have hurt much. Spain is Europe’s best-performing major economy, with growth averaging 3.1% over the past five years. Since 2002, the country has created half the new jobs in the euro zone. Unemployment has plummeted from more than 20% in the 1990s to 8.6%, within shooting distance of the 7.2% euro zone average. The government attributes more than half this stellar performance to immigration. “We are very thankful for all these people who have come here to work with us,” says Javier Vallés, economic policy chief for Prime Minister José Luis Zapatero.

Apparently all those immigrants haven’t “taken all the jobs.” Ask your favorite Lou Dobbs-loving friend to explain to you how this is possible.