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Offshoring in a Ricardian World [report]

Andrés Rodríguez-Clare
2007 unpublished
T echnological change has led to a dramatic decline in the cost of communication and in the cost of coordinating activities performed in different locations. This has allowed firms in rich countries to fragment their production process and offshore an increasing share of the value chain to low-wage countries. 1, 2 Richard Baldwin (2006) refers to this phenomenon as the "second unbundling." In his words, "rapidly falling transportation costs caused the first unbundling, namely the end of the
more » ... the end of the necessity of making goods close to the point of consumption. More recently, rapidly falling communication and coordination costs have fostered a second unbundling-the end of the need to perform most manufacturing stages near each other. Even more recently, the second unbundling has spread from factories to offices with the result being the offshoring of service-sector jobs." (Baldwin 2006, 7 ). The purpose of this paper is to explore the welfare consequences of this phemonenon. There has been much discussion recently about this with a specific focus on the impact of offshoring on rich countries. Two popular approaches can be clearly 1 Ronald W. Jones and Henryk Kierzkowski (1990) proposed this way of thinking about technological change, fragmentation, and international trade. Kei-Mu Yi (2003) develops a Ricardian model of trade to show that trade liberalization may also lead to increased fragmentation (or what he calls vertical specialization) and trade. This paper proposes a Ricardian model to understand the short-run and long-run aggregate effects of increased fragmentation and offshoring on rich and poor countries. The short-run analysis shows that, when offshoring is sufficiently high, further increases in offshoring benefit the poor country and hurt the rich country. But these effects may be reversed in the long run as countries adjust their research efforts in response to increased offshoring. In particular, in the long run, the rich country always gains from increased offshoring, whereas poor countries see their static gains partially eroded by a decline in their research efforts. (JEL F12, F23, L24, M16)
doi:10.3386/w13203 fatcat:tmunbm42jrgt3eqeetcsdiw6ka