Offshoring: General Equilibrium Effects on Wages, Production and Trade
A simple model of offshoring, which depicts offshoring as 'shadow migration,' permits straightforward derivation of necessary and sufficient conditions for the effects on wages, prices, production and trade. We show that offshoring requires modification of the four classic international trade theorems, so econometricians who ignore offshoring might reject the Heckscher-Ohlin 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. The model is extended to allow for two-way offshoring between similar nations, and to allow for monopolistic competition.
We thank seminars participants at the National University of Singapore (September 2006), Hitotsubashi University (December 2006), the Paris School of Economics (January 2007), and Oxford (February 2006) for comments, especially Pol Antras, Christopher Bliss, Jota Ishikawa, Ron Jones, Taiji Furusawa, Marc Melitz, Jim Markusen, Peter Neary, Volker Nocke, Thierry Verdier, David Vines, and Adrian Woods. We especially thank Gene Grossman and Estaban Rossi-Hansberg for comments on early drafts in September 2006 and November 2006. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.