Outsourcing and the Heckscher–Ohlin Model

The purpose of this paper is to incorporate the currently mushrooming phenomenon of outsourcing into the standard two‐sector, two‐factor Heckscher–Ohlin model of international trade. We first show how outsourcing modifies a firm's production function, and then demonstrate that outsourcing generally raises the return to capital and lowers the real wage, although the nation's GDP rises in proportion to the value‐added in the outsourcing industry. Furthermore, the output of the outsourcing sector may actually fall even though its unit cost goes down; the output of the other sector then rises. By contrast, employment in the outsourcing sector may actually rise.     

Outsourcing and Wage Inequality in a Dynamic Product Cycle Model

This paper constructs a dynamic North–South trade model with outsourcing and endogenous innovation. Production of high quality goods is first performed in the North (Northern phase), then split between the North and the South (Outsourcing phase), and finally shifted to the South (Southern phase). This cycle is reignited whenever a Northern firm innovates a higher quality product. We find that an increase in the fraction of outsourced production raises the Northern skill premium unambiguously, while raising the Southern skill premium if and only if the skill intensity of outsourced production is higher than that of local Southern production.     

A Regional Analysis of the Impact of Trade and Foreign Direct Investment on Wages in Mexico, 1984–2000

The conventional Heckscher–Ohlin model of trade predicts an equalizing effect of trade on wages in developing countries abundant in less‐skilled labor. Contrary to these predictions, skill premiums and skill demand increased in Mexico following trade liberalization. “New” trade theories have offered several channels through which trade can increase relative wages and demand for skilled workers. One such channel is foreign direct investment and outsourcing. Using the Mexican Household Income and Expenditure Survey (ENIGH) covering 1984–2000, the author examines the relationship between the demand for skill and maquiladora employment across regions and states. In contrast to previous studies based on manufacturing data for the 1980s, little evidence is found that growth in maquiladora employment is positively related to the increase in relative wages or wage‐bill share of more educated workers.     

DOES THE GRAVITY MODEL EXPLAIN SOUTH KOREA'S TRADE FLOWS?*

This paper applies the gravity model to explain South Korea's bilateral trade flows and to extract practical trade policy applications. A trade structure and an Asian‐Pacific trade network are included in the gravity equation to characterize the peculiarity of South Korea's trade patterns. The empirical result shows that South Korea's trade follows a Heckscher–Ohlin model more than an increasing returns or a product differentiation model. South Korea has large unrealized trade potentials with Japan and China, suggesting that they are desirable partners for an FTA. North–South Korean trade will expand markedly if bilateral relation normalizes and North Korea participates in APEC.     

International Trade and Volume Patterns under Quasilinear Preferences

We formally analyze the pattern and volume of trade by embedding quasilinear preferences in the standard perfectly competitive, two‐factor, two‐good, two‐country trade model. Quasilinear preferences deliver a natural partition of the two goods into a luxury and a necessity, and preserve the validity of the Heckscher–Ohlin and Heckscher–Ohlin–Vanek theorems. In addition, the predicted factor content of trade under quasilinear preferences is smaller (larger) than the predicted factor content of trade under homothetic preferences if and only if the luxury good is capital (labor) intensive. This result offers a novel explanation for the “missing‐trade” mystery.     

Unemployment of Skilled and Unskilled Labor in an Open Economy: International Trade,Migration, and Outsourcing

We show how international trade, migration, and outsourcing affect unemployment of skilled and unskilled labor, in a framework that integrates the Heckscher–Ohlin model of trade with the Shapiro–Stiglitz model of unemployment. Our approach allows us to analyze changes in not only aggregate unemployment, but also the distribution of unemployment between skilled and unskilled labor. As the analysis demonstrates, the unemployment rates of these two types of labor often move in opposite directions, thereby dampening the change in aggregate unemployment. Results depend on the source of comparative advantage, based on international differences in (for example) unemployment insurance or production technology.     

A Neo-Heckscher–Ohlin Model of Trade with Endogenous Production Patterns*

We propose a Neo-Heckscher–Ohlin (HO) model of trade that combines comparative endowment advantage, comparative technological advantage, international capital mobility and trade costs. Using an inframarginal approach, we produce a partition of the exogenous parameter space in a host of parameter value subsets that demarcate the various equilibrium patterns of production and trade. The results are startling! They suggest that production within the diversification cone – a key assumption of the Heckscher–Ohlin theory that is required for its core propositions (such as factor price equalisation) to hold – may only prevail on the razor's edge, or under exceptional circumstances. In addition, our findings nominate a mechanism by which improvements in transaction efficiency facilitate international trade thereby stimulating cross-country division of labour. Contrary to other generalisations of the Heckscher–Ohlin (such as the various derivatives of the Kemp–Jones model of trade), our model does not assume a purely Ricardian character: comparative endowment advantage may determine the pattern of trade even in the presence of opposing technological differences, as long as total factor productivity coefficients adjusted for transaction efficiency and factor intensity do not confer unambiguous comparative (technological) advantage. Still, ‘intensity-efficiency’-adjusted comparative technological advantage supersedes factor endowments in determining the flow of trade.     

Testing the Heckscher–Ohlin–Vanek theory with a natural experiment

I use the historical episode of near‐elimination of commuting from the West Bank into Israel to test three key predictions of the Heckscher–Ohlin–Vanek model of trade and find strong support for them. On the production side, I use variation between districts and find that wage changes were not correlated with the size of the shock to the labour force (factor price insensitivity) and that districts that received larger influx of returning commuters shifted production more towards labour‐intensive industries (Rybczynski effect). On the consumption side, data are consistent with identical homothetic preferences, which, combined with the production results, supports the Heckscher–Ohlin–Vanek theorem on the factor content of trade.     

MONOPOLISTIC COMPETITION WITH EFFICIENCY GAPS AND A HECKSCHER‐OHLIN TRADE PATTERN*

We develop a two‐factor, three‐sector model of international trade in which the monopolistically competitive firms are characterized by different fixed production costs. We show that, depending on the pattern of the international distribution of factor endowments, the trade pattern is determined not only by relative factor endowments as suggested by Heckscher and Ohlin, but also by absolute factor endowments via a mechanism of competitive selection in the monopolistically competitive sector.     

Trade,technology, and China's rising skill demand1

China has experienced rising wage inequality due to rising relative demand for skilled labour. In this paper, we use a sample of 1,500 firms to investigate the impact of trade and technology on China's rising skill demand. We find that export expansion had a negative direct effect (Heckscher–Ohlin type) and a positive indirect effect (export‐induced skill‐biased technical change) on skill demand; the net effect was found positive and accounted for 5 percent of rising skill demand of the sample firms. We find that technical change in Chinese firms was on average skill‐neutral, but majority foreign‐owned firms experienced skill‐biased technical progress that accounted for 22 percent of the rising skill demand of the sample firms.     

GREENHOUSE‐GAS EMISSION CONTROLS IN AN OPEN ECONOMY*

To examine how greenhouse‐gas emission controls affect a country's industrial and trade structures, this article presents an open economy model that has both Ricardian and Heckscher–Ohlin features. We specifically compare emission quotas, emission taxes, and emission standards. The patterns of production and trade critically hinge on those policy tools. It is shown that a domestic emission control may lead to carbon leakage and may not reduce the world emissions, and that emission standards may work as a “hidden” production subsidy toward an emission‐intensive industry.     

The Empirics of Comparative Advantage: Overcoming the Tyranny of Nonrefutability

I assess the empirical evidence on comparative advantage. I argue that the Heckscher–Ohlin–Vanek (HOV) relationship is not a refutable general‐equilibrium proposition. Consequently, the empirical Heckscher–Ohlin literature has been suffering from the tyranny of nonrefutability. The trade‐governing principle of comparative advantage, the Ricardo–Haberler–Deardorff (RHD) theorem, yields a refutable general‐equilibrium prediction about the pattern of international trade and allows for a theory‐based assessment of the magnitude of the gains from trade. The recent experimental evidence on Japan's nineteenth‐century opening‐up to world trade provides a strong case for the hypothesis that comparative advantage governed Japan's international trade in its early trading years. The aggregate gains from that trade are estimated to be no larger than 9% of Japan's GDP.     

European Agricultural Biotechnology Preferences and Policy: Growth and Trade Implications

European Union policies effectively prohibit the production and consumption of genetically modified agricultural products. This paper examines the prohibition's effects on research and development, innovation, trade flows, and economic growth using a Heckscher–Ohlin–Samuelson trade model with a neo‐ Schumpeterian approach. Restrictive European Union policies on biotechnology production and consumption result in: an effective export subsidy of capital to the South; changing trade flows; North America being the dominant producer of biotechnology research and development; the South being a dominant producer of biotechnology products; and the European Union being the dominant producer of traditional agricultural products.     

Trade theorems with search unemployment

Abstract We revisit the Heckscher‐Ohlin‐Samuelson model in the presence of labour market frictions à la Mortensen‐Pissarides. Relaxing the assumption of the one‐worker‐one‐firm matching rule, we show that the Stolper‐Samuelson theorem and the Rybczynski theorem may not hold in specific circumstances. We also demonstrate that the Factor Price Equalization theorem is valid only for capital and unemployed labour across countries, but not for employed labour. In equilibrium, trade patterns are determined by countries’ factor endowments and relative factor intensities in sectors (independent of factor intensities in production). Finally, our results suggest an additional explanation for the ‘missing trade’ phenomenon.     

Can Rich Countries Become Pollution Havens?*

This paper bridges the gap between two‐country Ricardian trade models where differences in environmental policies create pollution havens in a poorer region with weaker pollution regulations, and 2 × 2 Heckscher–Ohlin models that predict under certain conditions that pollution havens may occur in a richer region with tighter regulations. By relaxing the Heckscher–Ohlin assumptions of factor price equalization and no specialization, we show how creation of pollution havens in either region is possible, due to the interplay of policy and factor‐endowment motives. We also analyze the conditions for creating pollution havens in the cases of exogenous and endogenous environmental policy.     

International Trade and the Value of Time

I discuss a generalized Heckscher–Ohlin–Vanek (HOV) model in which consumption requires time as well as money (as in Becker's theory of the allocation of time) and the amount of work that a worker can do per unit of time—her “ability”—varies from country to country. High ability implies high income per hour, which implies a high value of time and, therefore, high consumption of the good that is more “time‐saving.” Therefore, if domestic production of this good is not commensurately high, it would have to be imported. In this way, I demonstrate that international differences in worker ability constitute an independent source of gains from trade. The model is able to explain several observed features of North–South trade that are not explained by the HOV model. The theoretical possibility of a Leontief paradox‐type trade pattern is also demonstrated.     

Industrial development in Malaysia and Singapore: Empirical analysis with multiple‐cone Heckscher–Ohlin Model

This paper employs the multiple‐cone Heckscher–Ohlin model to analyze industrial development in Malaysia and Singapore. In particular, we focus on industrial upgrading along with capital accumulation as a key determinant for the cross‐country difference in production technology and income. By pooling two countries’ data on factor endowment and sectoral output in manufacturing from 1990 to 2008, we estimate the common industrial development paths of the two‐cone Heckscher–Ohlin model, the Rybczynski linear relationship between capital–labor ratio and sectoral output per capita. Our results demonstrate that, after controlling for quality of workers (by educational attainment), the two countries resided in different cones during our sample period, implying that Singapore succeeded in accumulating capital steadily with the support of foreign investment and upgrading its industry mix to make it more capital‐intensive. The separation of cones is also consistent with the observed gap in gross domestic product per capita between the two countries. Furthermore, we implement a factor‐augmenting productivity test to see the gaps in efficiency of capital and human‐capital‐augmented labor and confirm no significant difference between the two countries.     

International Outsourcing and Unemployment in a Minimum‐wage Economy

To explore the impact of international outsourcing on unemployment and social welfare, the conventional trade model is extended by including both economies of scale and a minimum‐wage constraint in the unskilled‐labor market. In the paper, the scale economies are linked with the production of the most skill‐intensive good. It is shown that within such a framework, there is a trade‐off between a more socially desirable endowment allocation and a greater level of employment. Therefore, even though outsourcing could raise aggregate employment, this benefit is at the cost of further exacerbating the resource misallocation. In this way, the extensions to the traditional framework explored in the paper generate new insights as to why outsourcing may cause a net welfare loss to the home country.     

A New Dynamic Trade Model of Increasing Returns and Monopolistic Competition

This paper formulates a two‐country by two‐factor by two‐good dynamic Chamberlin–Heckscher–Ohlin model of international trade with endogenous time preferences. After proving the existence, uniqueness and local saddle‐point stability of the steady state, we examine the relationship between initial factor endowment and trade patterns in the steady state. It will be shown that (i) given that the representative household in each country supplies an equal amount of labor, only intra‐industry trade occurs in the steady state and (ii) other things being equal, the country with higher labor efficiency becomes the net exporter of the labor‐intensive good.     

A North–South model of outsourcing and growth

In this paper, I formulate a simple North–South R&D‐based growth model where final goods firms in the North endogenously determine the range of international outsourcing of intermediate goods to the South. I show that a fall in the trade cost (through trade liberalization) of intermediate goods in the North: (i) reduces the wage of the North relative to that of the South; (ii) increases the outsourced variety of intermediate goods in the North; and (iii) stimulates Northern R&D activity and economic growth in both countries. By conducting welfare analysis, I also show that a decline in the trade cost of intermediate goods in the North improves welfare in the South more than in the North.