The CP doesn’t hurt trade.
David Leblang and Margaret E. Peters 22, Leblang (Ambassador Henry Taylor Professor of Politics and Professor of Public Policy at the University of Virginia), Peters (Assistant Professor in the Department of Political Science at Yale University and resident faculty fellow at the Institute for Social and Policy Studies), May 2022, “Immigration and Globalization (and Deglobalization),” Annual Review of Political Science, Vol. 25
What accounts for the gap between theory and practice in the process of international economic exchange? In large measure, cross-border exchange is stymied by both formal and informal barriers. Scholars have devoted considerable energy toward documenting that trade and investment are facilitated by the reduction in barriers (e.g., Pandya 2014b), the adoption of bilateral investment treaties and preferential trade agreements (Buthe & Milner 2008, Neumayer & Spess 2005), and membership in international organizations such as the WTO (Milner 1999). Less attention has been paid to the importance of informal barriers—the role of inadequate information about trade and investment opportunities and the problems associated with weak contract enforcement. Migration, we argue, mitigates these latter barriers.
The idea that migrants or coethnic networks play an important role in international economic exchange is not novel. Greif (1989, 1993) illustrates the role of the Maghrebi traders of the eleventh century in providing informal institutional guarantees that facilitated trade. Cohen (1997, p. 170) identifies not only the Phoenicians but also the “Spanish Jews [who] were indispensable for international commerce in the Middle Ages. The Armenians controlled the overland route between the Orient and Europe as late as the nineteenth century. Lebanese Christians developed trade between the various parts of the Ottoman Empire.” Rauch & Trindade (2002) provide robust empirical evidence linking the Chinese diaspora to patterns of imports and exports with their home country. In fact, numerous studies show a robust effect of migrant flows on trade flows (Dunlevy 2006, Dunlevy & Hutchinson 1999, Felbermayr & Toubal 2012, Gould 1994, Hatzigeorgiou 2010, Head & Ries 1998, Herander & Saavedra 2005).
Migrants not only alter the flow of goods but also influence patterns of international portfolio investment and FDI. Most existing literature on international capital allocation emphasizes monadic factors like the importance of credible commitments and state institutional quality, failing to address explicitly dyadic phenomena that might also drive investment. Diaspora networks, in particular, facilitate cross-border trade and investment as they foster a greater degree of familiarity between home and host countries, leading to a greater preference for goods from and investment in specific countries (Rauch & Trindade 2002, Weidenbaum & Hughes 1996). Diaspora networks can also decrease information asymmetries in highly uncertain international goods and capital markets in two ways. First, they can provide traders and investors with salient information about their homeland, such as consumer tastes, that can influence investment decision making (e.g., Andrews et al. 2018, Graham 2019, Pandya & Leblang 2017). Second, they can share knowledge about trade and investment opportunities, regulation and procedures, and customs that decrease transaction costs associated with cross-border trade and investment (Gould 1994, Leblang 2010). Given the importance of social networks in driving migration, it is not surprising that bilateral migration flows can decrease information asymmetries. Studies have found that when imperfect information is a feature of a country dyad, migrants (especially the highly skilled) play a disproportionately large role in international capital allocation (Kugler et al. 2017). Other quantitative studies find substantively similar results for FDI alone (Aubry et al. 2012, Javorcik et al. 2011).