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Offshoring: General Equilibrium Effects on Wages, Production and Trade

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Author Info
Richard E. Baldwin
Frédéric Robert-Nicoud

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Abstract

A simple model of offshoring is used to integrate the complex gallery of results that exist in thetheoretical offshoring/fragmentation literature. The paper depicts offshoring as 'shadowmigration' and shows that this allows straightforward derivation of the general equilibriumeffects on prices, wages, production and trade (necessary and sufficient conditions are provided).We show that offshoring requires modification of the four HO theorems, so econometricians whoignore offshoring might reject the HO theorem when a properly specified version held in the data.We also show that offshoring is an independent source of comparative advantage and can lead tointra-industry trade in a Walrasian setting.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0794.

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Date of creation: May 2007
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Handle: RePEc:cep:cepdps:dp0794

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Related research
Keywords: Offshoring; Shadow migration; Inter-industry trade; Intra-industry trade; Tradetheorems;

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Find related papers by JEL classification:
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
R11 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Analysis of Growth, Development, and Changes

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James Markusen, 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," NBER Working Papers 11827, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December. [Downloadable!] (restricted)
  3. Woodland, A D, 1977. "Joint Outputs, Intermediate Inputs and International Trade Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 517-33, October. [Downloadable!] (restricted)
  4. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Papers 98-11, Michigan - Center for Research on Economic & Social Theory.
    Other versions:
  5. Mary Amiti & Shang-Jin Wei, 2005. "Fear of service outsourcing: is it justified?," Economic Policy, CEPR, CES, MSH, vol. 20(42), pages 308-347, 04. [Downloadable!] (restricted)
    Other versions:
  6. Francois, Joseph F, 1990. "Producer Services, Scale, and the Division of Labor," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 715-29, October. [Downloadable!] (restricted)
  7. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June. [Downloadable!] (restricted)
  8. Diego Puga, 1996. "The Spread of Industry: Spatial Agglomeration in Economic Development," CEP Discussion Papers dp0279, Centre for Economic Performance, LSE. [Downloadable!]
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  9. Davis, Donald R., 1995. "Intra-industry trade: A Heckscher-Ohlin-Ricardo approach," Journal of International Economics, Elsevier, vol. 39(3-4), pages 201-226, November. [Downloadable!] (restricted)
  10. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03. [Downloadable!] (restricted)
  11. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Wilhelm Kohler, 2004. "Aspects of International Fragmentation," Review of International Economics, Blackwell Publishing, vol. 12(5), pages 793-816, November. [Downloadable!] (restricted)
  13. repec:rus:hseeco:123689 is not listed on IDEAS
  14. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May. [Downloadable!] (restricted)
  15. Findlay, Ronald & Jones, Ronald, 2000. "Factor bias and technical progress," Economics Letters, Elsevier, vol. 68(3), pages 303-308, September. [Downloadable!] (restricted)
  16. Jones, R.W. & Marjit, S., 1992. "International Trade and Endogenous Production Structures," RCER Working Papers 312, University of Rochester - Center for Economic Research (RCER).
  17. Ng, Francis & Yeats, Alexander, 2003. "Major trade trends in East Asia : what are their implications for regional cooperation and growth," Policy Research Working Paper Series 3084, The World Bank. [Downloadable!]
  18. Mitsuyo Ando & Fukunari Kimura, 2005. "The Formation of International Production and Distribution Networks in East Asia," NBER Chapters, in: International Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14, pages 177-216 National Bureau of Economic Research, Inc. [Downloadable!]
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  19. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April. [Downloadable!] (restricted)
  20. Ronald W. Jones, 2000. "A Framework for Fragmentation," Tinbergen Institute Discussion Papers 00-056/2, Tinbergen Institute. [Downloadable!]
  21. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June. [Downloadable!] (restricted)
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  22. Ronald Findlay & Ronald W. Jones, 2001. "Input Trade and the Location of Production," American Economic Review, American Economic Association, vol. 91(2), pages 29-33, May. [Downloadable!] (restricted)
  23. Batra, Raveendra N & Casas, Francisco R, 1973. "Intermediate Products and the Pure Theory of International Trade: A Neo-Heckscher-Ohlin Framework," American Economic Review, American Economic Association, vol. 63(3), pages 297-311, June. [Downloadable!] (restricted)
  24. Joseph F. Francois, 1990. "Trade in Producer Services and Returns Due to Specialization under Monopolistic Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 109-24, February. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nana Bourtchouladze, 2007. "Offshoring and Heterogeneous Firms: One Job Offshored, One Job Lost?," HEI Working Papers 28-2007, Economics Section, The Graduate Institute of International Studies, revised Dec 2007. [Downloadable!]
  2. Amador, João & Cabral, Sónia, 2008. "Vertical specialization across the world: a relative measure," MPRA Paper 9618, University Library of Munich, Germany. [Downloadable!]
  3. Rosario Crinò, 2009. "Service Offshoring and White-Collar Employment," UFAE and IAE Working Papers 775.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  4. Michael Hübler, 2007. "A Simple Model of Outsourcing with Cournot Competition," Kiel Working Papers 1320, Kiel Institute for the World Economy. [Downloadable!]
  5. Andrés Rodríguez-Clare, 2007. "Offshoring in a Ricardian World," Working Papers id:1043, esocialsciences.com. [Downloadable!]
    Other versions:
  6. Ekholm, Karolina & Ulltveit-Moe, Karen-Helene, 2007. "A New Look at Offshoring and Inequality: Specialization Versus Competition," CEPR Discussion Papers 6402, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Amador, João & Cabral, Sónia, 2008. "International fragmentation of production in the Portuguese economy: What do different measures tell us?," MPRA Paper 9783, University Library of Munich, Germany. [Downloadable!]
  8. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Task Trade between Similar Countries," NBER Working Papers 14554, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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