Elevator pitch
Developing countries are often seen as unquestionable beneficiaries in the phenomenal rise of global value chains in international trade. Offshoring—the cross-border trade in intermediate goods and services which facilitate country-level specialization in subsets of production tasks—enables an early start in global trade integration even when the requisite technology and knowhow for cost-effective production from scratch to finish are not yet acquired. A growing economics literature suggests a more nuanced view, however. Policymakers should be mindful of issues related to inequality across firms and wages, labor standards, and effects of trade policy.
Key findings
Pros
Global input realignment leads to mutually beneficial efficiency gains for participating countries.
Offshoring can lead to employment and wage gains due to rising labor demand and productivity effects.
Countries participating in offshoring experience growth in high-quality jobs that can incentivize skill upgrades.
Suppliers of intermediate goods are typically subject to lower tariffs than those providing final goods.
Cons
Offshoring can induce unequal distributional consequences with adverse impact on small- and medium-sized firms.
Wage inequality between skilled and unskilled workers may grow in countries providing offshoring activities.
Workers in offshoring firms often perform monotonous jobs under poor conditions, and do not gain durable or marketable skills.
Countries become more susceptible to trade policy and trade cost uncertainty, and incentives to launch import barriers can be altered due to participation in global value chains.