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Offshoring and the Role of Trade Agreements

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  • Antràs, Pol
  • Staiger, Robert

Abstract

The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? Can trade agreements that are designed to address problems that arise when trade predominantly takes the form of the exchange of final goods be expected to perform in a world where offshoring is prevalent? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We do so by deriving the Nash and internationally efficient trade policy choices of governments in an environment in which some trade flows involve the exchange of customized inputs, contracts governing these transactions are incomplete, and the matching between final-good producers and input suppliers may involve search frictions. By characterizing the differences between Nash and internationally efficient policies in this environment, and by comparing these differences to those that would arise in the absence of offshoring of customized inputs, we seek to understand the implications of offshoring for the role of trade agreements. Our findings indicate that the rise of offshoring is likely to complicate the task of trade agreements, because in the presence of offshoring, (i) the mechanism by which countries can shift the costs of intervention on to their trading partners is more complicated and extends to a wider set of policies than is the case when offshoring is not present, and (ii) because the underlying problem that a trade agreement must address in the presence of offshoring varies with the political preferences of member governments. As a consequence, the increasing prevalence of offshoring is likely to make it increasingly difficult for governments to rely on simple and general rules - such as reciprocity and non-discrimination - to help them solve their trade-related problems.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6966.

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Date of creation: Sep 2008
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Handle: RePEc:cpr:ceprdp:6966

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Keywords: incomplete contracts; inefficiency; matching; offshoring; trade agreements;

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References

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Citations

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Cited by:
  1. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Change," Development Working Papers 262, Centro Studi Luca d\'Agliano, University of Milano.
  2. Richard Baldwin & Frédéric Robert-Nicoud, 2013. "Trade-in-goods and trade-in-tasks: An integrating framework," Research Papers by the Department of Economics, University of Geneva 13103, Département des Sciences Économiques, Université de Genève.
  3. Schmitz, Patrick W., 2013. "Bargaining position, bargaining power, and the property rights approach," Economics Letters, Elsevier, vol. 119(1), pages 28-31.
  4. Ornelas, Emanuel & Turner, John L., 2010. "Protection and International Sourcing," CEPR Discussion Papers 8070, C.E.P.R. Discussion Papers.
  5. Kyle Bagwell & Robert W. Staiger, 2009. "Delocation and Trade Agreements in Imperfectly Competitive Markets," NBER Working Papers 15444, National Bureau of Economic Research, Inc.
  6. Kyle Bagwell & Robert W. Staiger, 2009. "Profit Shifting and Trade Agreements in Imperfectly Competitive Markets," NBER Working Papers 14803, National Bureau of Economic Research, Inc.
  7. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Choice," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-172, Boston University - Department of Economics.
  8. Maya Cohen-Meidan, 2009. "Vertical Integration and Trade Protection: The Case of Antidumping Duties," Discussion Papers 08-034, Stanford Institute for Economic Policy Research.
  9. Jinjarak, Yothin, 2009. "Trade variety and political conflict: Some international evidence," Economics Letters, Elsevier, vol. 103(1), pages 26-28, April.

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