Offshoring and Patterns of Quality Growth: Evidence from Danish Apparel

Recently a small empirical literature has taken off attempting to analyze the role that quality plays in our understanding of trade. In particular, the recent work of Khandelwal (2010) has brought the insights of structural IO models of demand to bear into trade data. Our work builds on this new structural literature; we use similar demand estimation techniques on a panel of Danish apparel firms from 1997 to 2010 in order to analyze how firms responded to China’s entry to the WTO and the dismantling of the Multi-Fibre Agreement. We find substantial changes in the aggregate level as the distribution of quality tightens up and import competition appears to spur entry of higher quality firms and exit of lower quality producers. The reduction in trade costs leads to a massive increase in offshoring. The association of offshoring and quality depends on the quality of the sourcing country – while offshoring is generally associated with higher quality, offshoring to China is not. The reductions in trade costs also lead to changes in the distribution of prices and quality-adjusted prices. This has implications for policy as understanding the distribution of prices faced by heterogeneous consumers is key to understand how trade affects consumers along the income distribution.