Abstract
We investigate the issue of offshoring in a model of two countries and one sector of increasing returns to scale. Our model uncovers that in a setting of footloose capital, offshoring occurs and evolves in an inverted-U pattern when transport costs decline. This result can explain China's offshoring soaring in the past decades as well as its recent decline. We also provide an empirical support for it. More importantly, this simple framework can be applied to examine the welfare issue. We find that falling offshoring costs benefits the high-wage country but hurts the low-wage country. By contrast, trade liberalization benefits both.
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