We study the role of visa restrictions in determining export flows between firms and countries, and find a significant negative impact of visa restrictions. Our results indicate that visa costs not only diminish the value of export, but also the probability of new firms to enter visa restricted foreign markets. We interpret these results as evidence that visa restrictions contribute to trade costs faced by exporting firms.
There is no doubt that policy decisions in the area of foreign relations influence economic links between countries. However, quantifying these effects is usually very difficult – not least because visa regimes are relatively stable over time, not allowing for sufficient variation to estimate the effect of a regime change. As a result, decision-making is often based on very limited quantitative grounds, and mostly driven by qualitative intuition and strong political preferences. However, these decisions might have very important redistributive effects and create unequal access to markets for producers from different countries. For example, while WTO emphasizes a nondiscrimination clause to be one of the main principles of trade policies for member countries, foreign policy might become a very important source of discrimination in international trade.
An example of such policy decisions is visa requirement for foreign visitors. The channel of the effect is rather intuitive – visa requirements on foreign nationals might affect the intensity and costs of business visits needed to establish trade relations between firms in different countries.
In Kapelko and Volchkova (2015) we test the impact of foreign visa requirements on the international trade based on the Russian case. The Russian economy represents a unique setting to study the effect of visas on trade flows. Over the first decade of 2000, there were more than 30 visa regime changes between Russia and foreign countries. Thereby, there is sufficient variation for quantifying the export costs of visa restrictions.
Economists observe that when a pair of countries has visa restrictions – both bilateral and unilateral – their bilateral trade flows, tourist exchanges, and FDI flows are smaller compared to pairs of similar countries without these restrictions (Neumayer, 2011). The anecdotal evidence also indicates that business meetings, conferences and other interactions which involve people from different countries are often cancelled or delayed due to the failure of some participants to obtain visa stamps on time. Therefore, we can assume that costs of visas for international transactions include not only simple monetary costs associated with the visa fee but also less predictable components such as the risk of refusal, time costs, etc.
Economic research often relies on some intrinsic features of goods or industries as a way to test the hypothesis. Namely, if the extent of the studied effect depends on these features then one would compare the effects across goods or industries controlling for the features. In our case, if the effect of visas is due to risks associated with the inability of businessmen to attend meetings or negotiations, then we can expect a negative effect of visa restrictions on trade flows, which will be stronger for goods trade since it requires more interactions between the buyer and seller. For this study, we rely on Rauch’s (Rauch, 1999) definition of relation specific goods and compare the effect of visas across goods with different degrees of sensitivities to the relations.
The recent developments in trade theory and empirical research provide a specification of structural relations between country-level bilateral costs of trade and firm level decision to export. The heterogeneous firms approach brought by Marc Melitz (Melitz, 2003) to the international trade framework emphasizes that fixed costs of exporting play an important role in shaping patterns of exports. The literature distinguishes between fixed and variable costs of exporting, but the empirical evidence on cost composition is very limited and very little is known so far about the fixed costs of exporting. We proxy both these costs with visa restrictions, and use heterogeneity in firms’ decisions whether to export or not, to various destinations, to estimate the effect of visas on market access and trade flows.
We combine annual data on exporters, volume of export of each exporter to each destination from the Russian Customs Transaction Database with data on all bilateral visa constraints for the period 2003-2010 between Russia and 180 foreign export destinations.
First, we test whether Russian firms export less to countries which impose strict visa restrictions compared to countries with less restrictive visa regimes or visa waiver programs, other things being equal. We test these effects separately for trade in goods which are more specific to the parties involved in the transaction (relation-specific goods, such as manufactured goods, and equipment with specific technical requirements on part of buyer) and trade in goods that depend less on the parties involved in the transactions (non-relation specific goods, such as more homogeneous, standard goods) (Rauch, 1999). Then, we estimate the effects of visa restrictions on the value of trade to chosen destinations.
The obvious concern is that visa decisions are dependent on trade. Politicians might facilitate visa negotiations if the country’s economic interests expand toward some destinations. It might for example affect visa waivers between countries. To deal with this issue we use tourist flows between countries as an instrument to allow for more accurate measurement of visa effects.
Our empirical strategy is to use the two-stage least squares approach with weighing in the second step to eliminate the potential bias due to selection into exporters to particular destination (Imbens and Wooldridge (2009)).
Our results indicate that visas have a strong negative effect on market access, and it is twice as high for export of relation-specific goods as for export of non-relation specific goods. Controlling for the choice of destination, visas have a significant negative effect on the value of exports of relation-specific goods as well.
More specifically, our estimations indicate that:
- the probability of the firm to export to visa-restricted destinations is below the probability of export to visa-free destinations. The probability gap is estimated to be about 36 percent for the overall sample, 40% for relationship specific transactions and 26% for non-relationship specific export.
- the value of exports for relation specific goods is negatively affected by visa restrictions while there is no effect of visa restrictions on the export of non-relation specific goods. Our estimations indicate that the effect of visa is quite substantial so the value of relation specific export is twice as low to visa restricted as to visa free destinations.
These results emphasize the economic importance of visa restrictions and they are consistent with the assumption that visa restrictions do, in fact, contribute to the costs of market access. The negative effect of visa restrictions on the value of exports of relationship specific goods indicates that they also contribute to the variable costs of export.
The implications of this analysis may be very important. It demonstrates that visa regimes play a role as a non-tariff restriction or as a barrier, and can have significant effects on the development of trade relations between countries. The losses in trade due to visa restrictions are both extensive and intensive in nature: fewer firms are engaged in trade between countries with strong visa restrictions and they trade less in terms of more sophisticated goods. Therefore, we document at least two types of distortions in trade flows due to visas: visa distorts trade relations across countries with different visa requirements, and visa distorts trade flows across different types of goods to destinations with different visa requirements. Given the substantial negative effects of visas on trade relations, it is worth accounting for these economic costs when Ministries of Foreign Affairs engage in negotiations toward visa waivers.
- Helpman, E., M. Melitz, and Y. Rubinstein. 2008. Estimating Trade Flows: Trading Partners and Trading Volumes. Quarterly Journal of Economics, Vol. 123 No2, 441-487.
- Imbens, G., and J. Wooldridge . 2009. “Recent developments in the econometrics of program evaluation”. Journal of Economic Literature, 47(1) pp5-86
- Kapelko, N., and N. Volchkova. 2015. “Export costs of visa restrictions”, CEFIR Working Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2243136
- Melitz, M. J. 2003. “The impact of trade on intra-industry reallocations and aggregate industry productivity.” Econometrica 71(6).
- Neumayer, E. 2011. “On the Detrimental Impact of Visa Restrictions on Bilateral Trade and Foreign Direct Investment.” Applied Geography 31 (3): 901–907.
- Rauch, J. E. 1999. “Networks Versus Markets in International Trade.” Journal of International Economics 48 (1): 7–35.