The Pro-Trade Bias of Offshoring

Technological advance and improvements in communication technologies have facilitated the offshoring of jobs worldwide, where a typical scene following the supply chain involves developing countries importing finished products from developed countries that contain developing country labor content. We demonstrate that this pattern of offshoring can harbor a pro-trade bias, but only among countries upstream along the global supply chain. This upstream-downstream asymmetry has important implications on countries’ (i) incentive to violate trade agreements, and (ii) ability to leverage the dispute settlement procedures to punish violators. We then show that a well-enforced set of labor standards in developing countries, such as a binding minimum wage, resolves this conundrum by reviving the ability of the developing countries to use countervailing tariffs to punish trade agreement violators.