Mises Wire

If You Don’t Like Immigration, You Should Love Free Trade

Immigration restrictions and trade restrictions are often two policies that go hand in hand. Donald Trump, of course, provides an instructive example of a politician who has won elections while promoting both policies. 

Usually ignored, however, is the fact that trade restrictions work contrary to the goal of immigration restrictionism. That is, by restricting the movement of goods and services across borders, trade protectionists are creating the very conditions that are likely to increase incentives for workers to emigrate from low-wage areas into higher-wage areas. That is, if goods and services can’t move across borders, then people are more likely to move in order to reach those goods and services. 

The More Immigration Is Restricted, the More Important Free Trade Becomes 

As to the matter of immigration itself, we’ll leave that to other articles on this site — and there are plenty of them — to explore the matter. But, for the sake of argument, let’s say that the Congress passes a variety of highly-restrictive anti-immigration laws — and a large portion of the population is fine with it. 

As explained by Murray Rothbard in Power and Market, this government intervention in the market place would bring with it an array of market distortions. The restriction will curb firms’ ability to seek out the least expensive ways of producing goods and services. Thus, Rothbard notes, “the domestic citizens may very well lose more from immigration barriers as consumers than they gain as workers. For immigration barriers impose shackles on the international division of labor” and will therefore raise the cost of living for those who purchase the affected goods. 

In our thought experiment, however, much of the US domestic population may conclude that it is prepared to deal with a rising cost of living in order to not have any immigrants around. (Those who don’t want this increase in their cost of living are just out of luck.)

In this, case, then, if “not having immigrants around” is a priority, a prudent American population would embrace free trade. It would do this for two reasons: First of all, free trade will benefit Americans by lowering the cost of living. Second, free trade will increase the standard of living for both Americans and Mexicans, and reduce the incentive for the latter to emigrate. 

If immigration is restricted, firms will face barriers to lowering the cost of producing goods and services inside the US. The Plan B for competitive firms will then be to connect the most cost-effective labor with capital by some other means. In this case, Plan B will be to move capital investment to the places where the embargoed would-be immigrants live. Rothbard explains that under a regime of restricted immigration, 

The process of equalizing wage rates, though hobbled, will continue in the form of an export of capital investment to foreign, low-wage countries. Insistence on high wage rates at home creates more and more incentive for domestic capitalists to invest abroad. In the end, the equalization process will be effected anyway, except that the location of resources will be completely distorted.1

For the protectionist, of course, the answer to this situation is to interfere even more in the economy and to punish firms for moving capital investment to lower-wage areas. This is why Trump advocates for a “border adjustment” tax to do exactly that.  

The result of restricting both trade and immigration is to further raise the cost of living for Americans while cutting off foreigners — Mexicans, for example — from employment and capital that would have otherwise moved to their doorstep. 

Mexicans and Americans Suffer from Protectionism

In our example, those who suffer from this increasingly interventionist situation include: 

  • The workers who could have provided more cost effective labor in Mexico;
  • American producers who use the goods or services in question. This would include any business that uses goods affected by a border tax (i.e., automobiles, air conditioners, auto parts, televisions, etc.);
  • Consumers that purchase the taxed goods, plus all goods and services provided by producers that must also pay the border tax. 

Under a regime of restricted immigration, a small janitorial firm — for example — would have been restricted in its ability to legally hire Mexican nationals. Once trade restrictions are added to this regime, the situation becomes far more costly. Now that same firm must pay more for the Mexican-built trucks it uses. It must pay more for the Mexican-built machines, and it must pay more in health coverage for employers as Mexican-built medical instruments are also now more expensive. The result is that firms such as these will hire fewer workers, or hire workers at lower wages. Many small firms may also simply become uncompetitive and go out of business rendering both owners and employees unemployed. 

Meanwhile, in Mexico, a worker who had been content to work at a local factory building cars for the American market will see his wages drop. Or his job might be eliminated entirely. The worker had hoped to avoid the trouble of leaving behind friends and family and had wished to avoid the inconvenience of learning a new language and a new culture. Now that his job is gone or diminished, the relative attractiveness of illegally crossing into the US increases substantially. He then hires professional smugglers — truly violent criminals who are enriched even further by trade restrictions — and crosses the border. 

A Good Mexican Economy Is Good for Americans 

In the wake of the 1994 financial crisis in Mexico, the US government in typical fashion turned to bailing out investors. This was a huge transfer of wealth from American taxpayers to largely wealthy investors from wealthy nations. 

The Clinton administration, politically savvy as always, partially justified the move on the grounds that the economic fallout of the financial crisis in Mexico would create a wave of immigrants into the United States. 

Clinton was probably right, and the underlying assumption was right: what’s good for the Mexican economy is good for the US. It’s good for US residents in terms of reducing conflicts that arise from immigration. But, it’s also good for American workers and American producers who can benefit from the market demand of both consumers and workers in Mexico. 

But, while the Clinton administration’s bailout involved stealing from the taxpayers to benefit investors, free trade simply requires that people be allowed to act freely and use their property as they see fit. In other words, had the Clinton administration been interested in helping the Mexican economy — and the American one, of course — it would have insisted on immediate and unilateral free trade to combat the effects of the financial crisis. 

The effect would have been an immense shot in the arm for both the US and Mexican economies, while simultaneously lessening the incentives for Mexicans to migrate north. 

Thanks to special interests and lingering protectionist ideology in the US, however, that never happened, and we’re still hearing about how protectionism will “save American jobs.” Against 250 years of sound economic theory, protectionists continue to imagine a zero-sum economy in which a prospering Mexico must somehow be bad for the United States. The truth, of course, is that when free trade exists, economic growth among trade partners is mutually beneficial, and is enhanced by the trade itself. 

Mises: Free Migration Often — Free Trade Always  

Opponents and proponents of immigration may argue endlessly about the potential downsides and upsides of immigration. (For an especially nuanced and insightful view of the downsides, see Ludwig von Mises’s work on nationalism and immigration.) 

With free trade, though, there is no downside, which is why Mises, who allowed for a number of caveats on immigration, made no exceptions for free trade. 

For many modern protectionists, though, the desire to close off trade stems not just from economic ignorance, but from an emotional desire to actually harm other countries on nationalistic grounds. The economic implications of these policies then become secondary to other ideological agendas. Mises understood this well, and in Human Action concluded:

We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. ... The philosophy of protectionism is a philosophy of war.

  • 1This same argument could naturally apply to minimum wage laws or any other government intervention that increases nominal wages domestically.
Image Source: Cars made in Puebla, Mexico (www.flickr.com/photos/jaxport/17104977627/sizes/l)
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