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Liberalized Immigration As Free Trade: Economic Welfare and the Optimal Immigration Policy

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Liberalized Immigration As Free Trade: Economic Welfare and the Optimal Immigration Policy University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 1997 Liberalized Immigration as Free Trade: Economic Welfare and the Optimal Immigration policy Howard F. Chang University of Pennsylvania Carey Law School Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Business Law, Public Responsibility, and Ethics Commons, Commercial Law Commons, Constitutional Law Commons, Family, Life Course, and Society Commons, Immigration Law Commons, International and Comparative Labor Relations Commons, International Business Commons, International Economics Commons, International Trade Law Commons, Labor and Employment Law Commons, Labor Economics Commons, Law and Economics Commons, Law and Race Commons, Law and Society Commons, Race and Ethnicity Commons, Transnational Law Commons, and the Work, Economy and Organizations Commons Repository Citation Chang, Howard F., "Liberalized Immigration as Free Trade: Economic Welfare and the Optimal Immigration policy" (1997). Faculty Scholarship at Penn Law. 1403. https://scholarship.law.upenn.edu/faculty_scholarship/1403 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. LIBERALIZED IMMIGRATION AS FREE TRADE: ECONOMIC WELFARE AND THE OPTIMAL IMMIGRATION POLICY HOWARD F. CHANGt INTRODUCTION ................................................................................. 1148 I. NATIONAL ECONOMIC WELFARE .................................................. 1157 A. Effects of Immigration Through the LaborMarket ..................... 1158 B. External Effects ofImmigration ................................................ 1163 C. The Optimal Tariff on Unskilled Immigrants............................ 1166 D. The Optimal Tariff on Skilled Immigrants................................ 1168 E. Immigration of NuclearFamilies .............................................. 1172 E Future Generations.................................................................. 1172 G. AvoidingExternal Costs .......................................................... 1176 H . Unemployment ........................................................................ 1181 I. ConstitutionalLaw ................................................................. 1185 J. Citizenship, Guestworkers, and Illegal Immigration.................. 1190 K. Family-BasedImmigration as a Negative Tariff ....................... 1198 L. DistributiveJustice .................................................................. 1207 M. Preferencesfor the Ethnic Status Quo ........................................ 1210 II. CONCERN FOR THE WELFARE OF IMMIGRANTS ............................. 1221 A. The Optimal Tariff ................................................................. 1222 B. The Optimal Quota ................................................................. 1225 t Associate Professor of Law, University of Southern California Law School; Visit- ing Associate Professor of Law, Georgetown University Law Center. A.B., 1982, J.D., 1987, Harvard University; M.P.A., 1985, Princeton University; Ph.D., 1992, Massachu- setts Institute of Technology. I wish to thank Scott Altman, Lucian Bebchuck, Raj Bhala, Joseph Carens, Alan Deardorff, Mary Dudziak, Robert Ellickson, Thomas Grif- fith, Keith Hylton, Hiroshi Motomura, KevinJohnson, Louis Kaplow, Gregory Keating, Michael Knoll, Martin Levine, Saul Levmore, Edward McCaffery, Gerald Neuman, Daniel Ortiz, Eric Posner, Peter Schuck, Warren Schwartz, Michael Shapiro, Steven Shavell, Hilary Sigman,Julian Simon, Larry Simon, David Slawson, Edwin Smith, Mat- thew Spitzer, Christopher Stone, Jeff Strnad, Eric Talley, Michael Trebilcock, Charles Weisselberg, and workshop participants at the University of Southern California Law School, the Georgetown University Law Center, the University of Pennsylvania Law School, and Harvard Law School for useful comments. I also gratefully acknowledge financial support from the James H. Zumberge Faculty Research and Innovation Fund at the University of Southern California and the John M. Olin Program in Law and Economics at the Georgetown University Law Center. (1147) 1148 UNIVERSITY OFPENNSYLVANIA LAWREVlEW [Vol. 145:1147 C. The Optimal Allocation of Visas Subject to Quotas.................... 1228 III. GLOBAL ECONOMIC WELFARE ......................................................1229 A. Effects in the Global Labor Market ...........................................1232 B. ExternalEffects .......................................................................1233 C. Optimal FiscalPolicies ............................................................ 1234 D. Optimal Quotas ......................................................................1237 IV. CONCLUSIONS ..............................................................................1238 INTRODUCTION Since multilateral trade negotiations produced the General Agreement on Tariffs and Trade ("GATT")' in Geneva in 1947, the world has made dramatic progress toward free trade in goods. Sev- eral subsequent rounds of negotiations under GATT have steadily lib- eralized international trade, and numerous regional initiatives seek to deepen economic integration among countries prepared to go fur- ther. Standard economic theory prescribes free trade as the regime that maximizes global economic welfare. Economists also recom- mend trade liberalization as a policy that is likely to produce gains for each country. The gains from trade will arise from the fact that different coun- tries will produce various goods at different costs. When countries re- strict trade, the price of a good will be low in countries that can pro- duce the good at low cost, but its price will be high in countries that can produce the good only at higher cost. Liberalized trade allows both countries to gain. The high-price country can import the good at a price lower than the cost of producing the good at home; the low- price country can export the good and receive a higher price than it would otherwise fetch. Precisely the same theory applied to trade in goods also applies to trade in services. The Uruguay Round of trade negotiations recog- nized this fact in 1994, extending the international regulation of trade to service markets through the General Agreement on Trade in Services ("GATS") . Free trade in all services, including labor serv- ' General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. pt. 5, 55 U.N.T.S. 187 [hereinafter GATT]. 2 General Agreement on Trade in Services, Apr. 15, 1994, 33 I.L.M. 1167 [hereinafter GATS]. For a summary of the CATS, see MICHAEL J. TREBILCOCK & ROBERT HOWSE, THE REGULATION OF INTERNATIONAL TRADE 225-36 (1995), Bernard Hoekman, The GeneralAgreement on Trade in Services, inJOHN H. JACKSON ET AL, LEGAL PROBLEMS OF INTERNATIONAL ECONOMIC RELATIONS: CASES, MATERIALS AND TEXT 921 1997] IBERALIZED IMMIGRA TION AS FREE TRADE 1149 ices, would imply free movement of people across borders. To pro- vide many services, workers must cross borders to where the work must be performed, either on a temporary basis or to accept perma- nent employment.3 Thus, the free movement of workers across bor- ders promotes economic welfare by promoting free trade in the labor market 4 The European Union recognizes the importance of free mobility of labor as an element of a comprehensive free trade regime, enshrining this freedom in its constitution as one of the "four free- doms" that are the basic pillars of the European common market, "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured." 5 This "freedom of move- ment for workers" in turn entails "the abolition of any discrimination based on nationality between workers... with respect to employ- ment."5 Immigration barriers interfere with the free flow of labor interna- tionally and thereby cause wage rates for the same class of labor to di- verge widely among different countries. For any given class of labor, residents of high-wage countries could gain by employing more im- migrant labor, and residents of low-wage countries could gain by sell- ing more of their labor to employers in high-wage countries. Given (3d ed. 1995), or Pierre Sauve, Assessing the General Agreement on Trade in Services-Half- Full orHaIf-Empty?,J. WORLD TRADE, Aug. 1995, at 125. - Conversely, to consume services provided only in other countries, such as sight- seeing for tourists or education for students, the consumer must travel abroad. See Kevin R. Johnson, Free Trade and Closed Borders: NAFTA and Mexican Immigration to the United States, 27 U.C. DAVIS L REV. 937,964 (1994) ("True believers in the free mar- ket presumably would prefer the free flow of both labor and trade."). The Reagan ad- ministration's Council of Economic Advisors recognized the importance of the free flow of labor, noting: "Like international trade in goods ... international migration connects domestic and international markets. The free flow of resources in response to market signals promotes efficiency and produces economic gains for both producers and con- sumers. The migration of labor, both domestically and internationally, represents such a flow of productive resources." ECONOMIC REPoRT OFTHE PRESIDENT 213 (1986). 5 TREATY
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