Outsourcing and trade in a spatial world

This paper provides an analysis of outsourcing and trade in a spatial model à la Hotelling. In this setting, we discuss the trade-off between transport-cost-related disadvantages and outsourcing-related production cost advantages of a large economy and we investigate how the existence of national transport costs influences both the structure of industrial production and the pattern of final goods trade. In addition, the model gives a rich picture of the possible welfare effects of trade liberalization. In particular, we show that a final goods exporting country definitely gains from economic integration, while a final goods importing country may lose. Finally, when lowering domestic outsourcing activities, trade liberalization may reduce world welfare, even if pro-competitive effects lead to a decline in consumer prices.     

A specific-factors view on outsourcing

A distinctive feature of the present wave of economic globalization is that the principle of world-wide arbitrage is increasingly applied to individual components of value-added chains, rather than final goods. The result is a phenomenon called outsourcing, or international fragmentation. Economists have investigated this phenomenon with a focus on welfare and factor-price effects, mainly using Heckscher-Ohlin-type trade models. Existing studies emphasize a positive welfare effect of international fragmentation, but reveal ambiguous effects on factor prices. This paper first reviews the existing literature, identifying the crucial modeling differences that drive the various results. It then presents an alternative view on international fragmentation based on the specific-factors model. The analysis explicitly deals with the cost of international fragmentation, emphasizing that there will typically be a fixed-cost element, with important consequences for the welfare effect of outsourcing. Moreover, the paper highlights a crucial distinction between outsourcing with and without foreign direct investment. With foreign direct investment, outsourcing of a single fragment is sufficient to drive the domestic wage rate to the foreign level, adjusted for the cost of fragmentation. This holds irrespective of the factor-intensity ranking of fragments. If outsourcing takes place without foreign direct investment, then the factor-intensity ranking matters. Domestic labor loses if a labor-intensive fragments moves “offshore”, and vice versa. In both cases, international fragmentation may cause a welfare loss, if the cost of fragmentation includes a fixed element.     

Market linkages with fragmented production

I use a Ricardian model to analyze the transmission of technology shocks between countries when production processes are fragmented. The analysis emphasizes the role of three factors in determining how the gains from technical progress are shared between the innovating country and the rest of the world: the elasticity of substitution in consumption of final goods, the elasticity of substitution between intermediate and final production stages, and the pattern of production. In contrast to models with trade in final goods only, a high elasticity of substitution in consumption may be associated with losses for the innovating country when there is complete vertical specialization in production. I also examine the transmission of shocks in a three-country world where two countries are linked in a vertical production relationship.     

Fragmentation in simple trade models

This paper examines the effects of “fragmentation,” defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.     

The role of outsourcing in driving global carbon emissions

Globalisation has narrowed the gap between producers and consumers of goods and services. The linkages between international trade and carbon dioxide (CO₂) emissions have started to be recognised, yet the extent of outsourcing of emissions across nations is unknown. Filling this gap in knowledge is critical for designing effective policy mechanisms for assigning responsibility for reductions in emissions. Here we present a structural decomposition analysis of global trends in outsourcing of emissions from 1990 to 2010 for 186 individual countries. To this end, we disaggregate total CO₂ emissions for each country into contributions from the domestic economy and international trade. This allows us to unveil outsourcing trends for all nations confirming a world-wide shifting of emissions-intensive production across borders. We categorise nations into “outsourcers” – countries that outsource carbon-intensive production to so-called contractor nations. Our detailed assessment of the commodity content of global outsourcing flows reveals interesting insights about the trade of carbon-intensive commodities.     

Offshoring,globalization, and welfare

We investigate the issue of offshoring in a general-equilibrium model of two countries and one sector of increasing returns to scale. Our model uncovers that offshoring occurs and endogenously evolves in a bell-shaped pattern when trade costs decline, explaining some stylized facts in developed countries. Furthermore, this simple framework can be applied to examine the welfare issue. We find that a fall in offshoring costs benefits the high-wage country but hurts the low-wage country. On the other hand, the low-wage country benefits with trade liberalization. The impact of falling trade costs on the welfare of the high-wage country depends on the values of offshoring freeness.     

Trade Liberalization and Industrial Restructuring: The Role of Cross-Border Mergers and Acquisitions

This paper analyzes industry adjustments to trade liberalization. It introduces cross-border mergers and acquisitions (M&A) as an alternative mode of industrial restructuring to firms' exit. In a two-country Cournot model, we examine the responses of domestic and foreign firms endowed with different technologies for different stages of trade openness. It is found that the less efficient firm loses market shares in its home market at the beginning of trade liberalization. Only for a more advanced level of liberalization, does it take advantage of a larger access to foreign demand. Trade liberalization may therefore harm its profits too strongly, forcing it to leave the market. However, although its incentives decrease with trade liberalization, the high-technology firm may be willing to take it over for low organizational and technological costs of firms' integration. In addition, it may buy it out even if the less efficient firm manages to stay. Then, trade liberalization affects M&A incentives depending on the technological gap. For low and high (medium) gap, there is an inverted U- (W-) shaped relation between trade costs and incentives to merge. Moreover, although technology transfer is assumed to be complete, M&A may lead to a reduction in consumers' welfare. Firms may capture some pro-competitive gains from economic openness. Lastly, an empirical analysis based on a data set of OECD members' multinationals gives some support to these theoretical predictions.     

Global networks of trade and bits

Considerable efforts have been made in recent years to produce detailed topologies of the Internet, but so far these data have been overlooked by economists. In this paper, we suggest that such information could be used to characterize both the size of the digital economy and outsourcing at country level. We analyse the topological structure of the network of trade in digital services (trade in bits) and compare it with the more traditional flow of manufactured goods across countries. To perform meaningful comparisons across networks with different characteristics, we define a stochastic benchmark for the number of connections among each country-pair, based on hypergeometric distribution. Original data are filtered so that we only focus on the strongest, i.e. statistically significant, links. We find that trade in bits displays a sparser and less hierarchical network structure, which is more similar to trade in high-skill manufactured goods than total trade. Moreover, distance plays a more prominent role in shaping the network of international trade in physical goods than trade in digital services.     

中荷之间的任务贸易

在经济全球化时代,随着交易成本的降低和世界性专业化分工,国际贸易特征发生变化。任务贸易理论将替代李嘉图的比较优势理论。文章试图利用任务贸易理论来解释中荷之间的贸易。荷兰是通往欧洲腹地的通道,而中国负责为荷兰进行产品的生产和组装。这些都是典型的服务外包任务。     

Impact of trade liberalization on firm's labour demand by skill: The case of Tunisian manufacturing

This paper investigates the impact of the trade liberalization process in Tunisia on employment by distinguishing different skills and different types of firms using micro level data covering the period of 1983–1994. There is considerable disagreement among analysts on the impact of recent trade reforms upon labour. Our contribution to these debates in this paper is essentially an empirical issue. The analysis of a Tunisian firm's data may be viewed as an attempt to apprehend how employment in Tunisia, a developing country, adjusted to the trade reforms. Using micro-level detail on individual firms, we are able to trace the relationship between changes in trade policies and manufacturing employment at firm level and by skill. Although trade reforms are generally implemented at the sector level, their effects may vary significantly across firm characteristics such as output orientation. We measure the effects of trade policy on employment according to different types of firms. We also associate changes in employment directly with a measure of change in trade protection, rather than linking them to changes in imports and exports which would be more common. The results suggest that the impact of trade liberalization on labour demand depends on a firm's characteristics. In particular, the estimates obtained suggest that trade liberalization has beneficial effects on employment for exporting-firms. Conversely, trade liberalization has negative and disciplinary effects on employment for domestically oriented firms. The reduction in tariff levels conducted in this first phase of liberalization in Tunisia seems to have had effects with different intensity on unskilled labour and on skilled labour; this justifies the examination of these two skills.     

A micro-level insight on trade-induced job polarization and poverty in Russia

The effect of trade liberalization on workers with different skill levels at distinct types of firms is often surmised to be heterogeneous. This paper employs a longitudinal individual-level dataset—the Russian Longitudinal Monitoring Survey (RLMS)—to study the impact of trade liberalization on the relative poverty of various groups of workers in Russia. More specifically, we use the country’s accession to the World Trade Organization (WTO) as a quasi-natural experiment to analyze the impact of trade liberalization on workers at different skill levels and types of firms. Our analysis reveals significant trade-induced job polarization, meaning that, in the tradable sector, even though employment and wages are increasing for low-wage and the high-wage occupations, they are shrinking for mid-wage occupations, leading to a higher poverty rate for workers seeking employment in mid-wage occupations in that sector. Our results are robust to a battery of robustness checks, and they point to the crucial role of state-owned enterprises in attenuating the adverse effects of trade shocks on the welfare of workers.     

Growth and the dynamics of trade liberalization

This paper develops a model of ongoing trade liberalization as a self-enforcing equilibrium in a game between governments. Economic growth is a critical ingredient in successful trade liberalization. But differences in national growth rates have profound differences on the sustainable tariff equilibria of the game. If international technology spillovers are not concentrated in high-growth sectors, faster growing countries will be more protectionist, setting higher tariffs and liberalizing trade at a later date. But with spillovers more concentrated in high-growth sectors, faster-growing countries may be less protectionist. Differences in growth rates lead the process of trade liberalization to be far from reciprocal. A sustainable trade liberalization may actually involve one country pursuing a unilateral policy of free trade, even though its trading partner imposes tariffs against it.     

Environmental degradation,self-protection choices and coordination failures in a North–South evolutionary model

Environmental degradation may lead agents to increase their work effort to replace the consumption of depleted free access environmental goods with that of private substitute goods. The rise in the activity level that follows may further deplete the environment, which in turn increases the production and consumption of substitute goods. Using a North–South evolutionary model, we show that the existence of a coordination failure among interacting heterogeneous agents may lead the economy towards Pareto-dominated attracting stationary states where individuals work and produce “too much” (i.e. more than socially optimal). Finally, we analyse possible welfare effects of transferring the environmental impact of Northern production to the South and show that such a policy may decrease welfare in both hemispheres.     

Regionalism in the nineties: what effect on trade?

We apply a gravity model to 1980–1996 annual nonfuel imports data for 58 countries to quantify the effects of recently created or revamped PTAs on trade. We modify the gravity equation to identify separate effects of PTAs on intrabloc trade, members’ total imports and their total exports and to test for significant changes in trade patterns following the creation of trade blocs. We find no indication that ‘new regionalism’ boosted intrabloc trade significantly and we find trade diversion only for the EU and EFTA. The latter also exhibit ‘export diversion’, which could indicate their imposing welfare costs on other countries. Latin American trade liberalization in the 1990s had a positive impact on bloc members’ imports and, usually, exports.     

Does regionalism lead to more global trade integration in East Asia?

Since early 1999, global trade liberalization has been sidelined as regional trade agreements (RTA) have become the preferred choice in East Asia. Does this shift suggest that global trade and welfare levels will be raised? In contrast to unilateral trade liberalization, RTAs may well cause both ‘trade creation’ and ‘trade diversion,’ so that their net effect on global trade and welfare becomes ambiguous. It is conjectured that RTAs among “natural trading partners” are more likely to be trade-creating, and less likely to divert trade from non-member countries, in which case welfare will improve. We find that if an RTA involves geographically proximate countries (measured either by distance or border), trade significantly increases among them. At the same time, geographical proximity also contributes to increasing trade between members and the rest of the world. We examine how existing or proposed East Asian trading blocs affect intra-bloc and extra-bloc trade and thereby global trade. We find that the East Asian RTAs are likely to create more trade among members without diverting trade from non-members.     

Trade Liberalization and Poverty in Ecuador: A CGE Macro-Microsimulation Analysis

Cross-country analysis of the aggregate growth-poverty link is likely to miss important country-specific detail and possible offsetting forces in the underlying labour market adjustment process. This paper combines a CGE model analysis with a microsimulations approach to analyse the effects of trade liberalization on poverty and income distribution in Ecuador. The CGE model enables us to disentangle the general equilibrium effects of various trade policy scenarios on sector output, employment, factor incomes and household consumption. However, as is typical of CGE models, this analysis only provides distribution results for fairly aggregated groups of workers and a reduced number of representative households. The microsimulations approach adds the full distribution to the analysis and allows simulation of the effects of trade reform on the job status and remuneration of individual workers and thereby on household income distribution and poverty. The macro- microsimulation results indicate that the trade opening in Ecuador induced mild aggregate welfare gains, but rising income inequality due to rising wage differentials between skilled and unskilled workers implies virtually no poverty-reducing effect from trade liberalization.     

On the distributional effects of trade policy: Dynamics of household saving and asset prices

This paper studies the effect of trade liberalization on inequality. We develop a theoretical framework that generates economy-wide distributions of wealth and income for different levels of trade protection. The model unambiguously determines the effect of liberalization on inequality; and rationalizes why larger inequality can be the outcome of a welfare enhancing policy, as households reduce their buffer savings when liberalization lowers the price of food. The framework reconciles the increase in inequality, the fall in the value of land, and farmers’ opposition to freer trade, that have featured in different liberalization episodes. We also present empirical support for the model’s predictions.     

Vertical mergers and the balance of trade

This paper examines the relationship between the vertical merger and the balance of trade. Our results show that the effects of the vertical merger on the trade balance and consumers' welfare depend on the production technology adopted by the final good manufacturers. The vertical merger will improve both the trade balance and consumers' welfare when fixed-coefficient technology is adopted. However, these positive effects could not be held when variable-coefficient technology is used to produce the final good.     

Expansionary effects of the welfare state in a small open economy

We examine the relationship between welfare state policies and economic performance in a small open economy with (i) free trade in final goods and international capital mobility, and (ii) aggregate increasing returns to scale. Contrary to the conventional wisdom, we find that a retrenchment of welfare programmes is not an inevitable consequence of economic integration. Instead, by improving the exploitation of aggregate scale economies, social expenditure policies and international openness complement each other in facilitating an improvement in economic performance that can sustain a more generous welfare protection.     

全球化背景下我国出口退税政策的经济效应

本文通过将出口退税政策变量纳入全球模拟(GSIM)模型,从产业层面和全球视角对出口退税政策通过价格机制影响有关国家的生产、进出口贸易流量、生产者与消费者福利等经济活动进行理论分析。并基于2007年全球纺织品生产与贸易数据,对我国纺织品出口退税政策的主要经济效应进行了模拟分析。结果表明,提高纺织品出口退税率将使我国纺织品的产出、出口以及行业生产者的福利都有所增加,而纺织品内销量有所减少以及消费者的福利受损。