Asylum Policies, International Tensions and Trade Flows: Evidence from the EU

In the past few years, the European Union has witnessed a surge in the number of refugees claiming asylum on its soil. The increase was mainly driven by the mass arrival of migrants from strife-torn countries in the Middle East and Africa, as Figure 1 shows. The public debate that ensued focused only partly on the international humanitarian context, with national security, as well as economic and cultural considerations, receiving extensive coverage in the media (Berry et al., 2016). In the absence of a unified and comprehensive asylum system, the response to the migrant crisis was national and varied across the EU. As is apparent from Figure 2, the probability of being granted asylum for Iraqi refugees (Iraq is the second country that sends the highest number of asylum seekers after Syria in our sample) depended to a significant degree on the country where they chose to file their claim. This is consistent with Neumayer (2005)'s finding of a lack of convergence in asylum policies in Europe from 1980 to 1999.
Figure 1: Number of Asylum Seekers by Country of Origin

In an attempt to explain the uneven treatment of refugees, the international relations scholarship has argued that governments often use asylum policies as a foreign policy instrument. Teitelbaum (1984) asserts that admitting refugees serves as an overt acknowledgment of human rights violations and is often used to shame adversarial regimes. We build on this literature and use asylum policies as a measure for interstate tensions and then assess their impact on international trade.

Figure 2: Approval Rates of Iraqi Refugees

Through its scope and method, our paper is related to two strands in the Trade literature. First, Fuchs and Klann (2013) and Michaels and Zhi (2010) have already documented a negative impact of conflicts on trade. However, our approach is different in that we do not use discrete international events as a measure of tensions; instead, we introduce a continuous measure of tensions based on asylum applications. Second, the literature has also identified a strong and positive impact of refugees on international trade in the long-run (Parsons and Vezina, 2016; Steingress, 2017). By contrast, our paper aims to identify the short-run effect of refugees on international trade flows.

Our sample consists of the 28 EU member states (as of 2017) and 140 non-EU countries. We use annual data on trade flows and first-instance asylum decisions from 2002 to 2015. We define our measure of tensions between a EU country and a non-EU country as the probability that a randomly chosen asylum seeker in the former comes from the latter. Intuitively, this is a relative approval rate in that it measures the likelihood of being granted asylum relative to other refugees. However, it is very likely that approval rates and trade flows are determined simultaneously. Moreover, there might be unobserved factors correlated with both variables, which would further bias our estimates. In order to address these concerns, we use an instrumental variable approach that exploits the cross-sectional and times series variation in approval rates across the EU. Specifically, our instrument resembles the Bartik shock (Bartik, 1991) most often used in Labor Economics and is equal to the weighted average relative approval rate in all other European countries (the weights are given by the relative number of asylum seekers). Intuitively, our instrument identifies deviations from the regional average and uses them as an exogenous source of variation. Importantly, since the approach relies on a first-difference specification, time-invariant country-pair specific variables cancel out, mitigating the potentially non-random selection of refugees across the EU.

Our results point towards a large negative impact of interstate tensions, as measured by relative approval rates, on European imports. Poisson Pseudo-Maximum Likelihood (PML) and Multinomial PML estimates show that a one percentage point increase in the relative approval rate leads to a 1.5% drop in imports. First-difference two-stage least squares estimates are also negative and highly significant with the effect varying from 1.5% to 5.5%, depending on the specification. We do not, however, find any impact on European exports. To try to better understand this asymmetric effect, we investigate the impact of tensions on industry-level trade flows. We find evidence that European countries are more likely to reduce their consumption of homogeneous goods following an increase in relative approval rates than of differentiated goods. This is due to the fact that the former are more easily substitutable in international markets than the latter. By contrast, non-EU countries who predominantly buy differentiated goods produced within the EU may find it difficult to find different suppliers, especially in the short-run.

It is however crucial to highlight that these results hold for this particular type of migration in the short-run. The economic literature is not scarce in empirical evidence showing that migration is beneficial for economic growth and trade in the long run through various channels.
While our results are consistent with a recent literature studying more particular cases of tensions between countries and their impact on trade, we acknowledge two important points that we do not address. First, it would be valuable to impose more structure in order to better comprehend the micro-foundations of asylum policies and how these react to changes in trade flows. Second, even though we attempt to rationalize our results using industry-level trade flows, it is important to understand how firms adjust to the disruption of political ties for a broad panel of countries, which is a question that can only be explored with firm-level trade data. These suggestions are left to be investigated in future research.

Authors: Florin L. Cucu and Ludovic R. W. Panon


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