Article Critique of Outsourcing and Offshoring

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Here it is worthwhile to quote the author directly from the summary in the introduction to his paper:. It shifts focus to a new and different kind of Chinese technical innovation. What does Ricardo-Mill arithmetic tell us about realistic U. And, mind well, this would not be a short run impact effect.

Ceteris paribus it can be a permanent hurt. So it is not that U. There are no such neat net benefits, but rather there are now new net harmful U. What is in dispute is whether it represents outsourcing.

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Thus consider the example given by Samuelson in the last first of the two paragraphs quoted above which is incidentally fully in conformity with the definition of offshore outsourcing provided at the beginning of this note: But did any high I. The calls were made by the Americans and answered by the Americans—no international trade in them took place.

Virtually all activities associated with outsourcing—call center services, x-rays transmitted electronically to be read abroad, transcribing services, accounting services and virtually all back office services—have this property of having been non-traded before the Internet, phone and fax turned them into traded services. Therefore, the equilibrium at which Samuelson considers the productivity change is simply the wrong one to represent outsourcing: It is precisely because outsourcing has been modeled incorrectly as an export activity in the initial equilibrium.

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In the Bhagwati, Panagariya and Srinivasan paper mentioned above, we correctly model outsourcing services as initially non-traded. Productivity change takes the form of an electronic innovation that turns these non-traded services into traded ones. The benefits from importing cheaper services now necessarily arise just as many trade economists have stated in their policy writings.

These terms of trade may improve or worsen; there is no presumption as in the Samuelson model that they will necessarily worsen.

If they do worsen, the associated loss may or may not wipe out the primary gain from importing cheaper outsourced services relative to their domestic cost prior to outsourcing. One may go further and ask what if we already import outsourced services and China trains more workers that can expand the supply of the services subject to outsourcing? The answer is again in the negative since this is exactly opposite of the Samuelson scenario: China is getting better through acquisition of skills at producing the good it exports.

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Therefore, the primary effect of the expansion of outsourcing will still be positive. One must count on a strong negative secondary effect on the terms of trade in the other goods to produce an overall deterioration in the American welfare. Because America will earn prices that are at least as high as the cost of production of these services, such sales will generate benefits for America in the usual way.

The net effect will be a gain unless there are secondary terms of trade effects that more than offset the primary benefit from the in-sourcing. The Samuelson result, thus, does not capture the outsourcing phenomenon.

But it still captures one specific current fear, the fear that the trading partners of America such as China are getting better at the goods currently exported by the United States. If China enters in a big way the market for aircraft that it currently imports and America exports, to be sure, that will lower the prices of the Boeing aircraft and will make America worse off. But this is a different phenomenon than outsourcing. Thus, when the U.