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Brookings Trade Forum 2005 (2005) 1-23

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Modeling the Offshoring of White-Collar Services:

From Comparative Advantage to the New Theories of Trade and Foreign Direct Investment

University of Colorado–Boulder
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I have always viewed trade theory as consisting of a portfolio of models.1 There are many underlying causes of or motives for trade, and it is probably more productive to have a series of models analyzing just a few of these at a time than to attempt one grand model that includes all possible bases for trade. At the other extreme, we could envision a model for every industry and every country pair and perhaps every multinational firm. But at this point, theory coincides with case-study analysis and we learn nothing of any generality. So a parsimonious set of models, the number of elements greater than one but less than say one thousand, is probably a good scientific objective.

My first question in approaching my assignment for the Brookings Trade Forum is whether we can make good progress from off-the-shelf elements of our portfolio of models, or do we need an entirely new approach? The methodology I use to answer this question is to first ask another question: what are the important characteristics of the offshoring of white-collar services that we wish to capture in a theory model? Having identified a number of these characteristics, I am led toward the conclusion that we can indeed go a long way by drawing from our portfolio of models, mixing and matching elements to create a useful, empirically relevant, and productive subtheory for offshoring white-collar services. [End Page 1]

I sketch the outlines of a number of candidate "template" models, each of which captures some aspect of the problem. From analytical insights and numerical simulations of these models, I am then able to answer questions about the effects and consequences of technological or institutional innovations that permit offshoring to arise. These include effects on the national income of each country, effects on the relative and real prices of skilled and unskilled labor in each country, and effects on the volume of trade in goods (for example, are trade in goods and trade in services complements or substitutes?).

Before proceeding, I wish to emphasize that my goal here is to suggest ways of thinking about the issues in formal models. I was distressed following my presentation at the Brookings conference to find many people focusing on the results of some simulations, particularly with respect to "northern" welfare (read as U.S. welfare). All readers should understand that no theory says that a move from partial liberalization to full liberalization makes everyone better off. To push the point further, I am confident that I can concoct a model to generate any result desired by a reader with a deep pocketbook. I have tried hard to stick to reasonable and relevant structures and assumptions, but even so, qualitative results sometimes depend on specific parameter values, as we shall see.

In the following section, I provide a brief overview of some of our theory portfolio and then identify some of the crucial aspects of offshoring we wish to capture. Finally I present a series of template models.

Our Theory Portfolio

We can usefully draw from existing theories and models of trade in order to make progress on offshoring. I do not claim that the list is exhaustive or that alternative taxonomies might not be more useful; I just believe that these particular elements will prove useful.

Comparative advantage theories of trade in goods. Our traditional trade theory tends to focus on differences among countries as the primary motive for trade. The Ricardian model of trade, in which countries possess different technologies, is usually listed first. Second, the workhorse model of trade is factor-proportions or Heckscher-Ohlin theory, in which differences in factor intensities among goods intersect with differences in factor endowments among countries to determine a pattern of comparative advantage and...


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pp. 1-23
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Archived 2012
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