Frontiers in Research on Offshoring (Summary)

On August 3, 2018, the "Frontiers in Research on Offshoring" workshop was held as a part of the Analyses of Offshoring project led by Jota Ishikawa (RIETI Faculty Fellow). In the workshop, four distinguished scholars in the field of international trade—Arnaud Costinot (MIT), Ngo Van Long (McGill University), Wolfgang Keller (University of Colorado Boulder), and Andres Rodriguez-Clare (University of California at Berkeley)—and two project members introduced and discussed their papers.

Arnaud Costinot presented the paper entitled "Robots, Trade, and Luddism." This paper investigates how the government should respond to productivity shocks caused by an increase in import penetration from low-income countries and by an increase in the share of robots in the economy using tax instruments. They show a novel envelope result that generalizes the evaluation of productivity shocks in a distorted economy. They also analyze Pareto efficient tax rates imposed to firms employing new technologies and those employing old technologies under various conditions. Furthermore, they offer equations linking the theoretical Pareto efficient tax rates and observables and provide numerical results. A counterintuitive result is that the government has incentive to reduce the tax rate imposed to new technology firms when there is a positive productivity shock due to an increase in imports from other countries and an increase in the share of robots in the economy. These considerations are invaluable when we consider how the government should respond to deepening globalization and rising share of robots when we care about income distribution.

Ngo Van Long presented the paper entitled "Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power." This paper investigates offshoring and reshoring by extending Antras (2005). By introducing endogenous bargaining power under incomplete contract, they find the possibility of offshoring as well as reshoring. Some specific conditions for wage rates and bargaining power determine whether offshoring or reshoring would happen. This could explain the offshoring and reshoring in the current world.

Wolfgang Keller presented the paper entitled "Globalization, Gender, and the Family." The paper uses the abolition of Multi-Fiber Agreement as a quasi-natural experiment to study the impact of import competition on workers in textile and apparel industries in Denmark based on employer-employee matched data. They find that marriage and new children increased, largely driven by women. This finding of gender-biased adjustment has an important implication especially for Japan, where the gender gap has been debated.

Tomohiro Ara presented the paper entitled "Tariffs, Vertical Oligopoly and Market Structure." This paper investigates the impact of tariffs on intermediate-input trade by explicitly decomposing the trade volume into the intensive margin and the extensive margin, and examines how this decomposition affects the characterization of the optimal tariff for input trade. In contrast to final-good trade, the paper finds theoretically and empirically that even unilateral tariff reductions in input trade induce entry of firms in both liberalized and liberalizing countries, and contribute to a new welfare gain from trade that arises only in vertical specialization.

Hiroshi Mukunoki presented the paper entitled "Tariff elimination versus tax avoidance: Free trade agreements and transfer pricing." If multinational firms manipulate their transfer prices to comply with the rules of origin of free trade agreement (FTA), there is the case where a formation of FTA reduces the profits of all exporting firms. FTAs may also hurt consumers in the FTA countries. The paper points out that the welfare effect of an FTA critically depends on how countries control transfer pricing, and it provides important policy implications.

Andres Rodriguez-Clare presented the paper entitled "External Economies of Scale and Industry Policy: A View from Trade." The paper develops a new method of estimating external scale economy of manufacturing industries by using only bilateral trade data across countries. Estimates are reasonable, e.g., heavy manufacturing industries such as automobile show greater scale economies than light manufacturing such as apparels. The authors estimate welfare gains from optimal industries policies for several countries and find only negligible gains.