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Trade liberalization and strategic outsourcing

  • Chen, Yongmin
  • Ishikawa, Jota
  • Yu, Zhihao

This paper develops a theory of strategic outsourcing that arises due to trade liberalization. With trade liberalization, a domestic firm may choose to purchase the intermediate good from a more efficient foreign producer, who also competes with the domestic firm in the final-good market. This can result in higher prices for both the intermediate and final goods. Although trade liberalization in the final product would lower the price of the final good, it could cause the price of the intermediate product to either increase or decrease, depending on the characteristics of the final products. Therefore, in the presence of strategic outsourcing, trade liberation can have ambiguous effects on consumer prices, depending on the relative tariff reductions for intermediate and final goods.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 63 (2004)
Issue (Month): 2 (July)
Pages: 419-436

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Handle: RePEc:eee:inecon:v:63:y:2004:i:2:p:419-436
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. Zhao, Laixun, 2001. "Unionization, vertical markets, and the outsourcing of multinationals," Journal of International Economics, Elsevier, vol. 55(1), pages 187-202, October.
  2. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, vol. 86(2), pages 240-45, May.
  3. Matthew J. Slaughter, 1995. "Multinational Corporations, Outsourcing, and American Wage Divergence," NBER Working Papers 5253, National Bureau of Economic Research, Inc.
  4. Hwang, Hae-Shin & Schulman, Craig T., 1993. "Strategic non-intervention and the choice of trade policy for international oligopoly," Journal of International Economics, Elsevier, vol. 34(1-2), pages 73-93, February.
  5. Gordon H. Hanson, 1994. "Localization Economies, Vertical Organization and Trade," NBER Working Papers 4744, National Bureau of Economic Research, Inc.
  6. Jota Ishikawa & Barbara J. Spencer, 1996. "Rent-Shifting Export Subsidies with an Imported Intermediate Product," NBER Working Papers 5458, National Bureau of Economic Research, Inc.
  7. Ishikawa, Jota & Lee, Ki-Dong, 1997. "Backfiring tariffs in vertically related markets," Journal of International Economics, Elsevier, vol. 42(3-4), pages 395-423, May.
  8. Kala Krishna & John Morgan, 1996. "Implementing Results-Oriented Trade Policies: The Case of the US-Japanese Auto Parts Dispute," NBER Working Papers 5680, National Bureau of Economic Research, Inc.
  9. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  10. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers 1996_21, Columbia University, Department of Economics.
  11. Horst Raff & Nicolas Schmitt, 2000. "Endogenous Vertical Restraints in International Trade," CESifo Working Paper Series 284, CESifo Group Munich.
  12. Van Long, Ngo & Riezman, Raymond & Soubeyran, Antoine, 2005. "Fragmentation and services," The North American Journal of Economics and Finance, Elsevier, vol. 16(1), pages 137-152, March.
  13. Ruth R. Raubitschek & Barbara J. Spencer, 1994. "High-Cost Domestic Joint Ventures and International Competition: Do Domestic Firms Gain?," NBER Working Papers 4804, National Bureau of Economic Research, Inc.
  14. Barbara J. Spencer & Ronald W. Jones, 1989. "Trade and Protection in Vertically Related Markets," NBER Working Papers 3023, National Bureau of Economic Research, Inc.
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