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The Impact of International Migration on International Trade: an Empirical Study of Australian Migrant Intake from Asian Countries

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The Impact of International Migration on International Trade: an Empirical Study of Australian Migrant Intake from Asian Countries THE IMPACT OF INTERNATIONAL MIGRATION ON INTERNATIONAL TRADE: AN EMPIRICAL STUDY OF AUSTRALIAN MIGRANT INTAKE FROM ASIAN COUNTRIES Sidney Mankit LUNG B. Bus. (Hons.) International Trade, Victoria University This thesis is submitted in total fulfilment of the requirements of the degree of Doctor of Philosophy School of Applied Economics Faculty of Business and Law Victoria University Melbourne Australia May 2008 ABSTRACT In the context of established international economic theory, it is well known that international trade of commodities is effectively trading factors of production such as labour and capital. It follows that if factors of production can be moved internationally, then the need for commodity trade is eased, and trade of commodities and movements of factors of production can be substituted for each other. From this, the conclusion can be reached that factor movement is a substitute for commodity trade. Allowing people to migrate from one country to another country involves migration of labour – the movement of a factor of production. The conclusion that factor flows are a substitute for commodity-trade can be re-stated as international immigration is a substitute for international trade. However, this conclusion does not explain the real world in which both international trade and international immigration have increased over time. Thus, established theory of immigration and trade may not be a reliable policy guide for formulating immigration and/or trade policy. It is the purpose of this thesis to formulate an alternative theory, which more effectively explains the relationship between immigration and trade. For the purpose of distinguishing the impact of immigrants on trade from the impact of other factors on trade, this thesis employs a two-step approach. The first step lays down the theoretical foundations by arguing that immigrants contribute to the economy of the immigrant receiving country in two areas: Firstly, immigrants supply labour to the immigrant receiving country and increase demand for goods and services, hence increase the size of the economy in the immigrant receiving country. Secondly, immigrants bring in intangible social capital and human capital with them (in addition to any tangible capital they bring with them). Both contributions have impacts on international trade. The increasing labour supply could reduce trade, but increasing the market size, and bringing in social capital, in the form of foreign market information, could facilitate trade. i The second step employs the latest econometric techniques to test empirically the theory that is developed in the first step, using real world data. The main empirical technique employed in this thesis to analyse the effect of immigration on trade is the gravity model that is estimated using cross-section and time series (panel) data. The case of Australia’s immigration and trade with ten major Asian trade partner countries is selected for the study. The panel cointegration test is conducted to investigate the possible long run equilibrium relation between immigration and trade. The short-run relation between immigration and trade is also examined. This thesis successfully distinguishes between the impact of immigrants on trade and the impact of other influential factors on trade. A strong long run relation between immigration and exports is established. Within a certain range of immigrant intakes, immigrants have positive and significant impact on Australia’s exports to the immigrant home countries. The long run impact is found to be double the strength of the short run impact. However, a long run relation between immigration and imports cannot be clearly established by the panel cointegration test, and the impact of immigrant intake on imports is not strong. Since the long run relation between migrant intake and exports can be established, it is possible that an underlining causation exists. Therefore, a panel causality test on immigration and exports is conducted. The results show that migrant intake “Granger causes” exports, but exports do not Granger cause immigration. This thesis demonstrates that international labour immigration, unlike the movement of other factors of production, is not necessarily a substitute for international trade in the manner described by established international economic theory. In the case of Australia’s immigration and trade with Asian immigrant home countries, immigrants have long run and short run positive impacts on exports, although immigrants do not have a strong impact on Australia’s imports from Asian migrant home countries. Moreover, migrant intake “causes” exports. ii The main policy implication of these findings is that Australia can use immigration as a long-term strategy to promote exports to Asian countries. iii ACKNOWLEDGMENTS Encouragement, assistance, and support from my family and friends and guidance from academic community motivated me to continue my efforts to achieve my dream of completing this thesis. Every piece of help I received during this long haul of study is significant to the successful completion of the thesis. I thank Dr. Lindsay Smyrk, since my idea to enrol in the Ph. D. research programme was sparked by a casual conversation with Dr Smyrk, at the School of Applied Economics of Victoria University. I am grateful to my principal supervisor, Dr. P. J. Gunawardana, who also supervised me to achieve a first-class honour in my honours year studies, leading to my success in winning the competitive, prestigious APA scholarship from Australia Federal Government. I am deeply indebted to Dr. Gunawardana for his guidance throughout the whole period of candidature, his patience about my progress, his comments on my drafts and his understanding of my personal and family circumstances. His encouragement and support in motivating me to continue this study are unforgettable. Thanks are also extended to the Victoria University Scholarship Committee and the Australian Federal Government for the financial assistance. Without the APA scholarship, this research would not have started in the first place. Help was also received from many staff members of the School of Applied Economics. Among them, my co-supervisor, Dr. Segu Zuhair, offered time for discussions in modelling issues and econometric issues, Dr. K. Jegasothy shared his mathematics knowledge in matrix algebra and his econometric knowledge in panel cointegration and commenting on my drafts regarding the panel cointegration test. My knowledge of productivity diversity from immigration is sharpened by Associate Professor Dr. Santina Bertone. General advice was received from Associate Professor Alan Morris. My mathematical knowledge in derivatives and integration was sharpened by Mr. Jim Bates. Advice on thesis formatting and iv EndNote experience were received from Dr. Inka Havrila. Computer support was promptly provided by Mr. Coskun Susoy and the IT support team. I am also grateful to instructions from Academia in the United States. Professor Chihwa Kao of Syracuse University offered time for numerous discussions regarding his expertise in panel cointegration test as well as the GAUSS codes for Brownian motion simulation. Professor Bruce E. Hansen of University of Wisconsin-Madison provided advice regarding the long run covariance process and his GAUSS codes. Associate Professor Peter Pedroni of Williams College offered his articles on his groundbreaking panel cointegration test techniques. My sincere thanks are also extended to Associate Professor David Harris of the University of Melbourne for his emails regarding the Brownian motion simulation and Associate Professor Brett Inder of Monash University for his willingness to assist in regression estimation. The greatest sacrifice was by my wife Polly (Sau Wah) who bore the greatest burden to look after the family and to keep the children away in order to help my studies. I feel sorry for imposing such difficult tasks on her for several years and I am grateful to her for tireless support and encouragement throughout my candidature period. I am also thankful to my children, my elder son Dominic, my twin boys Frederick and Benjamin and my sweet little girl Naomi for being their understanding and being patient, as I could not pay sufficient attention to them. I am also grateful to our good neighbour and good friend, Ms. Mary Fisher for her long support. Her love like our mother and like our children’s grandmother is unforgettable. I would like to dedicate this thesis to my father, brother and sisters who love me the most and are proud of me, and in memorial to my late mother and late brother who suffered illnesses and were unable to see the completion of this thesis, but they will exist in my memory for ever. Sidney Mankit Lung 2008 v DECLARATION “I, Sidney Mankit LUNG, declare that the PhD thesis entitled The Impact of International Migration on International Trade: An Empirical Study of Australian Migrant Intake from Asian Countries is no more than 100,000 words in length, exclusive of tables, figures, appendices, references and footnotes. This thesis contains no material that has been submitted previously, in whole or in part, for the award of any other academic degree or diploma. Except where otherwise indicated, this thesis is my own work”. Signature Date vi TABLE OF CONTENTS ABSTRACT..........................................................................................................................i ACKNOWLEDGMENTS ..................................................................................................iv
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