Archived — Perspectives on North American Free Trade: Paper Number 3: Trade Liberalisation and the Migration of Skilled Workers

by Steven Globerman, Western Washington University and Simon Fraser University, April 1999

Executive Summary

This report discusses and evaluates the relationship between trade liberalisation and the migration of skilled professional and managerial workers in the Canadian context. In particular, it considers whether and how the Canada-U.S.. Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA) may have affected bilateral flows of permanent and non-permanent immigrants between Canada and the United States.

Classical economic theory leads to a prediction that trade and factor movements are substitutes, so that freer trade between Canada and the United States could be expected to reduce incentives for bilateral migration. On the other hand, the modern theory of the multinational corporation stresses the potential need for factor movements, especially the relocation of managers and technical experts, to expedite production rationalization and increased international trade following trade liberalisation. Since the overwhelming bulk of international trade is carried out by multinational companies (MNCs), foreign direct investment theory suggests that freer trade between Canada and the United States, to the extent that it encourages increased intra-industry trade and investment, might be expected to increase economic incentives for bilateral migration.

The report briefly reviews available evidence on the economic effects of the FTA and the NAFTA and concludes that the former, if not the latter, arguably contributed to increased bilateral trade and direct investment over and above what might have been expected had the relevant Agreement not been implemented. Hence, to the extent that factor mobility and international trade and direct investment are net complements, as the modern theory of the MNC argues, the implementation of the FTA should have increased incentives for bilateral migration. Economic incentives for temporary migration would arguably be particularly strengthened by the need for North American MNCs to adjust their production and marketing strategies to the liberalised trade environment.

Laws and regulations establishing criteria and quotas for permanent and temporary immigration will obviously have an important influence on actual immigration patterns. The report briefly discusses major recent changes in immigration laws and regulations implemented by the U.S. and Canadian governments. The net impact of those changes is to make permanent bilateral immigration more difficult but to lower the costs and difficulties associated with temporary immigration. The report then goes on to consider the following issues: 1) Has there been a significant increase in bilateral temporary immigration between Canada and the United States? 2) Is any such increase primarily the result of complementarity between increased trade, investment and factor mobility, or does it primarily reflect other factors, such as better earnings prospects in the other country?

Consideration of these issues proceeds first by examining data on permanent and temporary migration. Patterns of permanent bilateral immigration have been fairly constant over the past two decades, suggesting that trade liberalisation per se has had little impact on permanent immigration. This result could reflect conflicting influences of trade liberalisation on incentives to immigrate. It undoubtedly reflects the fact that immigration laws in the two countries provide only limited scope for increased permanent immigration based upon economic criteria. On the other hand, temporary migration under the new visa arrangement introduced by the FTA (the TC visa) and continued under the NAFTA (the TN visa) has increased consistently since the implementation of the FTA. In particular, the migration of Canadians to the United States using the TC/TN visa has increased by approximately 3000 to 4000 (visas granted) per year. It is suggestive that the number of American professional workers emigrating temporarily to Canada has also increased consistently since 1989, although at a substantially slower rate than comparable migration of Canadian TC/TN visa holders. By itself, these observations would suggest that the increase in temporary migration reflects the adjustments of North American MNCs to trade liberalisation. This observation is also consistent with increased bilateral flows of intra-company transferees. On the other hand, the number of temporary Canadian immigrants using the H-1B visa has declined since 1989 suggesting that the TC/TN visa route may have substituted for the H-1B route at the margin.

The motives for increased Canadian out-migration using the TC/TN were also evaluated through two small-scale surveys carried out through electronic mail. In one survey, a set of Canadian employers was interviewed. A second survey interviewed a set of U.S. companies. The survey responses were fairly consistent in pointing to career development as being a strong motivation for Canadians to migrate temporarily to the United States. Higher salaries in the United States were also identified as a strong motivator with lower taxes being acknowledged as relevant but less important. It is interesting that American employers view their hiring of Canadians as being "long-term". That is, they do not contemplate the employment relationship as likely to be terminated in the near future. It is also relevant in this regard that a growing percentage of Canadians entering the United States under various temporary visas are converting their status to permanent residents. It is possible that the substantially stronger American labour market is encouraging Canadians who would otherwise return to Canada after participating in the U.S. market to remain indefinitely.

The report concludes with a brief assessment of the policy implications of the main findings. While these findings do not permit strong or unambiguous conclusions, they caution against a growing perception that Canada is suffering a substantial and economically damaging "brain drain". First, the number of temporary migrants is absolutely and relatively small. Second, some (unknown) portion of temporary migration is facilitating increased integration with the U.S. economy, and that, by itself, is a benefit to Canada. As well, some temporary Canadian immigrants are acquiring managerial and technical skills in U.S. companies that may impart benefits to the Canadian economy when those immigrants return to Canada. At the same time, the survey results provide some grounds for concern to policymakers about the labour market environment for highly skilled workers in Canada. In particular, higher after-tax incomes in the United States are an attraction for skilled Canadians to migrate. While policies to address this situation, such as lowering marginal tax rates for high-income earners, can be identified, it can be argued that their implementation should not be motivated purely by a desire to reduce temporary emigration. However, if policy changes are desirable for broader macroeconomic considerations, their implementation might also have a desirable indirect impact on temporary migration. Specifically, temporary migration motivated by "tax arbitrage" and related motives will be reduced. As a consequence, it is more likely that the temporary migration of Canadians will be of net benefit to the Canadian economy as a whole.

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