people in developing countries and thereby raising demands for an easing of restrictions on international migration.

# **Arguments for Reducing Trade Distortions and Migration Barriers**

Even before examining the empirical estimates of the benefits and costs of grasping various trade- and migration-liberalizing opportunities, the case can be made that such reform in principle is beneficial economically.<sup>4</sup> It then remains to examine whether particular reforms are also positive or negative in terms of net social and environmental outcomes. The latter cannot be dealt with here in the same depth as the narrower economic analysis, but it is important because there are many who believe or assume the net social and environmental consequences are sufficiently negative as to outweigh the net economic benefits of market opening. We begin with the static and then dynamic gains from trade arguments and then turn briefly to the economic effects of international migration of workers.

## **_Static economic gains from own-country trade and subsidy reform_**

The standard comparative static analysis of national gains from international trade emphasizes the economic benefits from production specialization and exchange so as to exploit comparative advantage in situations where a nation’s costs of production and/or preferences differ from those in the rest of the world. This is part of the more general theory of the welfare effects of distortions in a trading economy, as summarized by Bhagwati (1971). Domestic industries become more productive on average as those with a comparative advantage expand by drawing resources from those previously protected or subsidized industries that grow slower or contract following reform. The gains from opening an economy are larger, the greater the variance of rates of protection among industries – especially within a sector, insofar as resources are more mobile within than between sectors (Lloyd 1974). Likewise, the more productive domestic firms _within_ industries expand by drawing resources from less productive firms that contract or go out of business. Indeed theory and empirical studies suggest the shifting of resources within an industry may be more welfareimproving than shifts between industries.<sup>5</sup> The static gains from trade tend to be greater as a share of national output the smaller the economy, particularly where economies of scale in production have not been fully exploited and where consumers (including firms importing intermediate inputs) value variety so that intra- as well as inter-industry trade can flourish. Lessthan-full exploitation of scale economies is often the result of imperfect competition being allowed to prevail in the domestic marketplace, which again is more common in smaller and poorer economies where industries have commensurately smaller numbers of firms. This is especially the case in the service sector. One example is sub-sectors such as utilities, where governments have been inclined to sanction

> 4 This survey does not pretend to provide a comprehensive coverage of the gains-from-trade theory, and is even more limited in covering the economics of international migration. For more trade theory, readers are referred to the handbooks by Grossman and Rogoff (1995) and Harrigan and Choi (2003) and the new textbook by Feenstra (2004). For a survey of the economics of migration, see for example Borjas (1994) and Faini, de Melo and Zimmermann (1999).

> 5 See Melitz (2003) on the theory of this point and Trefler (2004) for an early empirical illustration.

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