Do immigrants reduce bilateral trade costs? An empirical test

Abstract

We use the first comprehensive estimates of bilateral trade costs to test the extensively stated, but rarely evaluated, hypothesis that immigrants reduce trade-related transaction costs. Our results provide robust and direct evidence supporting this often-posited hypothesis. We examine the period from 1995 through 2010 using data that represent 174 im-migrant home countries and 19 OECD member host countries. We find that a 10% increase in the stock of immigrants from a given home country that reside in a given host country corresponds with a 1.04% decrease in the overall bilateral trade costs between the home and host countries. While different in magnitudes, we also find that the effect of immigrants, in reducing trade costs, persists across both manufactured and agricultural products.

Keywords:

• gravity model
• immigrants
• trade costs

JEL Classification:

• F220
• F140

Notes

¹ See, for example, Gould (1994), Girma and Yu (2002), and Tadesse and White (2013).