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Bilateral trade impacts of temporary foreign visitor policy

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Abstract

Using country-level panel data from 1950 to 2003, this paper critically examines the impact of the US Visa Waiver Program (VWP) on bilateral trade levels. Our empirical analysis uses a variety of specifications, estimators, and robustness checks, including a “random growth” specification that controls for selection bias from both time-varying and time-invariant unobserved country-specific characteristics. The results indicate that a temporary foreign visitor policy with less requirements, such as the US VWP, tends to increase the bilateral trade levels between the US and the selected VWP countries, especially for US exports. This suggests that VWP may have encouraged business travel and commerce enough such that there are export benefits from this less restrictive temporary foreign visitor policy of about 10–20% (~2–4% in tariff equivalent terms).

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Notes

  1. Note that obtaining a visa does not guarantee entry to a foreign country. A visa document only states that an individual is eligible to enter a foreign country for a specific purpose. The final decision for entry rests with each country’s border authority.

  2. See, for instance, Gould (1994), Head and Ries (1998), Dunlevy and Hutchinson (1999, 2001), Rauch and Trindade (2002), Girma and Yu (2002), Wagner et al. (2003), Blanes (2005), Combes et al. (2005), Mundra (2005), and Faustino and Leitão (2008).

  3. This data is available for years 1989–1996, 1998, 1999, and 2002–2004 for the following countries only: Argentina, Australia, Belgium, Brazil, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Kenya, Korea, Morocco, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and Venezuela. These data about the flow of temporary nonimmigrants to the United States come from the Department of Homeland Securities’ online database for the years 1998, 1999, and 2002–2004. Data for 1989–1996 comes from the annual Statistical Yearbook of the Immigration and Naturalization Service. In all cases data comes from the chart titles “Nonimmigrants admitted by country of citizenship.” Online database accessed on October 31, 2005. Available at <http://uscis.gov/graphics/shared/statistics/data/index.htm>.

  4. The results of these regressions are not reported here in the spirit of conciseness, but are available from the authors upon request.

  5. Admittedly, the advancement in communication technologies has tempered the need for face-to-face business meetings to conduct contract negotiations in recent years. However, it is still fairly conventional that one party travels abroad to sign and formalize a trade agreement.

  6. An interesting study that is beyond the scope of the current paper is to investigate the direct impact of temporary business immigration on trade and use the VWP participation as an instrument in a two-stage least squares procedure. We attempted to go this route but the available US temporary business visitor data is only available for a limited number of years and countries.

  7. We are grateful to Xuepeng Liu for sharing his data with us.

  8. We also estimated our models by using different time periods (i.e., from 1960 to 2003 and from 1970 to 2003) to check the robustness of our results. The findings were similar.

  9. Multilateral resistance requires the use of either bilateral imports or bilateral exports (instead of average trade) as the dependent variable in the gravity equations (Baldwin and Taglioni 2006). We use both bilateral imports and exports as a dependent variable to mitigate the bias introduced by averaging the trade flows.

  10. For instance, see Rauch (1999), Rauch and Trindade (2002), Girma and Yu (2002), Santos-Silva and Tenreyro (2006), Helpman et al. (2008), Liu (2009), and Roy (2010a, b).

  11. We investigated this selection problem further by analyzing whether countries that have traded more with the US in the past tend to be selected into the VWP program (see Aw et al. 2000 for a similar approach). If selection issues are present, the trade volumes of VWP countries tend to be higher than non-VWP countries in years even prior to the establishment of the VWP. Results of this analysis indicate that there are indeed selection issues (i.e., trade volumes were already higher for VWP countries prior to the start of the program). These results are available upon request. A similar approach was used by Clerides et al. (1998), Bernard and Jensen (1999), and Aw et al. (2000) in a different context.

  12. In our case, we know that visa denial rates and a host of social, economic, and political factors are some of the unobserved variables that are considered for the US to select a country into the VWP. Since these unobserved variables are roughly time invariant, then first-differencing or fixed effects transformation will take care of the majority of selection problems.

  13. Note that the parameter estimates from an OLS estimation of the first-differenced equation in Eq. 2 can also be produced by using a least squares dummy variable (LSDV) approach to Eq. 1 where country-specific dummy variables are included in Eq. 1 to represent a i .

  14. Another approach to account for time-varying variables that may cause selection problems is to use propensity score matching (PSM) procedures. But this may not be appropriate in this case since we only have a small cross-sectional sample of countries. In addition, PSM procedures would only account for observable time-varying characteristics and would still not account for unobservable time-varying characteristics. .

  15. Note that based on Jensen’s inequality, the expected value of the logarithm of a random variable is different from the logarithm of its expected value, i.e., E(lnT) ≠ ln E(T).

  16. By using nonparametric specifications, Henderson and Millimet (2008) also suggested estimating the gravity models using the levels of the trade flows.

  17. We made the transformation advocated by Halvorsen and Palmquist (1980), which is \( (e^{{\hat{\beta }_{VWP} }} - 1) \times 100 \); the antilog of the estimated coefficient on the VWP dummy, subtracting 1, and multiplying by 100.

  18. The tariff equivalent estimate requires an estimate of the price elasticity, which can be obtained by including price or tariff variables in the regressions. Unfortunately, our data does not include the price and tariff variables. In order to estimate the tariff-equivalent effect of VWP, we followed Rose and Van Wincoop (2001) and used a price elasticity of 5. We then computed the tariff equivalent effect of VWP by using the \( \exp (\hat{\beta }_{VWP} /\sigma - 1) - 1 \) transformation. Also, see Hummels (1999), Head and Mayer (2000), Head and Ries (2001), Eaton and Kortum (2002), Lai and Trefler (2002), and Anderson and Van Wincoop (2003, 2004) for more information on tariff equivalent estimate.

  19. See Angrist and Pischke (2009) for a helpful discussion on the use of these two methods.

  20. We believe that the magnitudes of these VWP trade effects (especially the one 10% export effect in Eq. 7) are reasonable based on previous estimates of permanent immigration effects on trade. Girma and Yu (2002) found that a 10% increase in immigrant stock can increase long-run exports by 5%. If VWP can increase temporary immigrant stock by 20% or more, then the magnitude of our export effects is not unrealistic.

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Acknowledgments

We are indebted to an anonymous referee, Sylvia Kuenne, and Harmen Lehment for their useful suggestions. We also would like to thank Xuepeng Liu for sharing his data with us.

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Authors and Affiliations

  1. University of Texas, Arlington, Arlington, TX, USA

    Mahmut Yasar

  2. Emory University, Atlanta, GA, USA

    Mahmut Yasar

  3. Columbia University, New York, NY, USA

    David Lisner

  4. Department of Agricultural and Resource Economics, North Carolina State University, Raleigh, NC, 27695-8109, USA

    Roderick M. Rejesus

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  1. Mahmut Yasar
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  2. David Lisner
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Correspondence to Mahmut Yasar.

Appendix

Appendix

1.1 Background of the US national visa policy and the US visa waiver program

The US issues visas in two broad categories: immigrant visas for individuals seeking permanent residence in the US and nonimmigrant visas for individuals that still maintain foreign residences but wish to temporarily enter the US for business, tourism, work, study, medical treatment, etc. As with most other countries, the US generally requires all foreign nationals wishing to visit on a temporary basis to first obtain a visa from a US consulate abroad prior to entry.

There are twenty-four major nonimmigrant categories in the US, such as tourists, workers, refugees, etc., and seventy specific visas for which an application can be made (see Office of Immigration Statistics (2003) for more details). Each visa varies according to entry reason and length of stay (or period of validity of the visa). For example, tourist visas are usually granted for ninety day periods, while student visas may last considerably longer. Visas may also vary by being either single or multiple entry. The former allows an individual to gain entry only once without obtaining a new visa, and the latter allows an individual to gain multiple entries on a single visa during its period of validity.

During the visa application process, US policy places the burden of proof on the applicant to show that he or she is eligible for the desired visa (GAO 2002). In addition, applicants for temporary immigration visas must prove that they are not coming to the US for permanent residence. Individual applications may either be accepted for entry or denied for various reasons. Some examples of grounds for immediate denial are, inter alia, terrorist links, criminal histories, or health hazards (see US Immigration and Naturalization Act Section 212 for a complete list of grounds for inadmissibility). Interviews are usually required with an immigration officer at a US consulate and an amount of paperwork commensurate with filing IRS income tax forms is also often needed (GAO 2002). Individuals with more complicated situations may require more documentation and more time to successfully apply. US visa fees are currently $100 non-refundable and the time required for processing varies by individual consulate but can range from a few days to a few weeks (Note: information obtained from the US State Department Website: http://travel.state.gov/visa/visa_1750.html, (3/6/2006). Finally, temporary immigrants must present completed I-94 visitor information forms to border inspectors in conjunction with a visa to enter the US.

In the interest of facilitating international travel and commerce, as well as to more efficiently allocate scarce immigration enforcement resources, the US implemented the Visa Waiver Program (VWP) that allows citizens of qualified countries to enter the US as nonimmigrants (for the purpose of either business or pleasure/tourism) without obtaining a visa, as long as they stay for periods of 90 days or less (GAO 2002). Originally created on a temporary basis under the Immigration Reform and Control Act of 1986, the program was subsequently made permanent under the Visa Waiver Permanent Program Act of 2000. The VWP began admitting temporary immigrants from Japan and the United Kingdom in 1988 and has since grown to include 27 countries in 2004 (see Table 4 for a list of participating countries).

Table 4 Visa Waiver program participating countries and year of program entry
Full size table

In order to participate in the VWP, a country must meet several requirements. First, a country must extend reciprocal visa-free travel to US nationals seeking temporary admission into their country. A country must have a US visa refusal rate no higher than an average of 3% over the last two years and not exceeding 3.5% in any single year (CRS 2005). Prior to 1997 this requirement was set at 2 and 2.5%, respectively (CRS 1998). The country must also issue machine-readable passports. In addition, the US Justice Department must review a country’s case and not object to its participation on a host of political, social, legal, and economic conditions that may threaten US interests. Particular attention is given to security issues and the likelihood that participation in the program may increase nonimmigrant “overstays” (i.e., increase illegal immigration). Then, in consultation with the Attorney General, the Secretary of State decides whether to admit a country into the VWP (GAO 2002). The Secretary of State may also terminate a country’s participation for violations of any requirements. Notably, Argentina’s and Uruguay’s participation were terminated in 2002 and 2003, respectively, on the basis of domestic turmoil that may lead to increased nonimmigrant overstays (CRS 2005). See Table 4 for a list of the countries that participated in the VWP and their year of program entry.

In addition to being a citizen of a participating country, foreign individuals applying for entry through the VWP must satisfy several individual requirements. For example, individuals seeking entry through the VWP must have a valid passport, seek entry for 90 days or less as a temporary visitor for either business or pleasure/tourism, and waive the right to a hearing. They must also pass an identity check at the US port of entry and they should have complied with all conditions of any previous admission under the program. Foreign individuals from participating VWP countries must also possess a return ticket if entering by air or sea, and if entering by land show proof of financial solvency and foreign residency (GAO 2002). Beginning in 2006, individuals must also present passports with electronic integrated information chips (CRS 2005). Entrants under the VWP are also unable to change their nonimmigrant status while in the US.

Most relevant to this paper are those temporary business immigrants that seek entry to the US as business visitors who engage in commercial transactions but not employment. Business visitors that apply for entry using normal visa application procedures (i.e., foreign individuals from non-VWP participating countries) are typically granted multiple-entry visas for a maximum duration of six months, during which time applications for additional six month extensions can be made. Business visitors from VWP participating countries can enter the US under all the conditions specified in the program’s legislation as described. The major difference is that business visitors from VWP participating countries do not need to formally apply for visas, but they can only stay in the US for only a maximum of 90 days at a time.

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Yasar, M., Lisner, D. & Rejesus, R.M. Bilateral trade impacts of temporary foreign visitor policy. Rev World Econ 148, 501–521 (2012). https://doi.org/10.1007/s10290-012-0122-5

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