We use the terminology North–South trade to describe trade between the developed countries (North) and developing countries (South), as is generally understood.
How ‘Little’ Outsourcing Creates A Large Skill Premium: A Model of North-to-South Manufacturing Outsourcing
Version of Record online: 19 DEC 2012
© 2012 Wiley Publishing Asia Pty Ltd
Pacific Economic Review
Volume 17, Issue 5, pages 635–659, December 2012
How to Cite
Tang, X. (2012), How ‘Little’ Outsourcing Creates A Large Skill Premium: A Model of North-to-South Manufacturing Outsourcing. Pacific Economic Review, 17: 635–659. doi: 10.1111/1468-0106.12002
- Issue online: 19 DEC 2012
- Version of Record online: 19 DEC 2012
This paper develops a general equilibrium model that shows that a small volume of North–South 1 trade (i.e. 2% of Northern GDP) could have caused the observed rise in the skill premium, thus resolving the ‘small trade volume paradox’ in the skill premium debate. We apply the concept of ‘trade in tasks’ of Grossman and Rossi-Hansberg to analyze the nature of North-to-South manufacturing outsourcing. As a conceptual innovation, we carefully distinguish two different implicit assumptions of the Heckscher–Ohlin model: ‘factor immobility’ versus ‘task inseparability’. We show that outsourcing, as a form of trade in tasks, essentially attains ‘task separability’ while apparently retaining factor immobility, thus rendering the traditional Heckscher–Ohlin framework obsolete for analyzing current North–South trade. We argue that this change in the nature of trade calls for new thinking in economics and public policy-making.