Introduction

A reduction in the cost of one type of international transaction – lower transport costs for goods trade or the liberalisation of a factor flow – generally changes the incentives to make other international transactions. There are many examples of the way in which changing trade barriers may change the incentives for factor mobility, although some of these examples pull in opposite directions. For example, in discussion of EU trade policy towards Eastern Europe it is suggested that making trade in goods easier might reduce the incentives for labour to emigrate (Begg et al., 1992). In the study of migration from Europe to the USA in the late nineteenth century, it is argued that reductions in transport costs for agricultural products increased the incentives for labour migration, both inter-regionally and internationally (Harley, 1978, 1980). In a regional context, it is often suggested that falling transport costs were a trigger for migration to cities, as the costs of feeding the urban population were reduced (Bairoch, 1988).

The objective of this chapter is to provide an overview of theory on the relationship between trade liberalisation and factor mobility. What does theory suggest about the way in which reducing the costs of making some transactions changes the incentives to make others? Under what circumstances will goods-trade liberalisation reduce factor flows, and under what circumstances will it increase them? What are the consequences of these factor flows for trade?

This chapter addresses these issues in a number of commonly used trade models, each of which illustrates different forces that may be important.