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Offshoring: general equilibrium effects on wages, production and trade

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  • Richard E. Baldwin
  • Frédéric Robert-Nicoud

Abstract

A simple model of offshoring is used to integrate the complex gallery of results that exist in the theoretical offshoring/fragmentation literature. The paper depicts offshoring as ‘shadow migration’ and shows that this allows straightforward derivation of the general equilibrium effects 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 who ignore 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 to intra-industry trade in a Walrasian setting.

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File URL: http://eprints.lse.ac.uk/19720/
File Function: Open access version.
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19720.

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Length: 32 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ehl:lserod:19720

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Related research

Keywords: Offshoring; Shadow migration; Inter-industry trade; Intra-industry trade; Trade theorems;

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References

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  1. Avinash K. Dixit & Gene M. Grossman, 1981. "Trade and Protection with Multistage Production," NBER Working Papers 0794, National Bureau of Economic Research, Inc.
  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.
  3. 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.
  4. 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.
  5. Puga, Diego & Venables, Anthony J., 1996. "The Spread of Industry: Spatial Agglomeration in Economic Development," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 440-464, December.
  6. 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.
  7. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
  8. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
  9. Ronald W. Jones & Ronald Findlay, 2001. "Input Trade and the Location of Production," American Economic Review, American Economic Association, vol. 91(2), pages 29-33, May.
  10. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  11. 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.
  12. 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.
  13. 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.
  14. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing: Is It Justified?," NBER Working Papers 10808, National Bureau of Economic Research, Inc.
  15. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
  16. 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.
  17. Jones, R.W. & Marjit, S., 1992. "International Trade and Endogenous Production Structures," RCER Working Papers 312, University of Rochester - Center for Economic Research (RCER).
  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.
  19. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
  20. Findlay, Ronald & Jones, Ronald, 2000. "Factor bias and technical progress," Economics Letters, Elsevier, vol. 68(3), pages 303-308, September.
  21. 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.
  22. 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.
  23. Ronald W. Jones, 2000. "A Framework for Fragmentation," Tinbergen Institute Discussion Papers 00-056/2, Tinbergen Institute.
  24. repec:rus:hseeco:123689 is not listed on IDEAS
  25. Wilhelm Kohler, 2004. "Aspects of International Fragmentation," Review of International Economics, Wiley Blackwell, vol. 12(5), pages 793-816, November.
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