muddles - The Muddles over Outsourcing Jagdish Bhagwati...

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The Muddles over Outsourcing Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan* Forthcoming in revised form: The Journal of Economic Perspectives ) Note: Readers who are not theoretically inclined may skip Section III without loss of continuity. Abstract Critics have muddled the public debate over offshore outsourcing by using the term interchangeably to refer to altogether different phenomena such as on-line purchase of services, direct foreign investment and, sometimes, all imports. We argue that clarity requires distinguishing among these various phenomena and define outsourcing explicitly as the services trade at arm's length that does not require geographical proximity of the buyer and the seller—the so-called Mode 1 services in the WTO terminology— conducted principally via the electronic mediums such as the telephone, fax and Internet. The definition is appropriate because this is the phenomenon that is relatively new and scary in public consciousness and has fueled the recent “outsourcing” debate. Under this definition, the total number of the U.S. jobs outsourced annually is minuscule and is expected to remain so over the next decade, even on a gross basis (i.e., without adjusting for the jobs in-sourced to the U.S.). The fears that offshore outsourcing will lead to high- value jobs being replaced by low-value jobs down the road are also argued here to be implausible in view of several qualitative arguments to the contrary. We also demonstrate that offshore outsourcing of Mode 1 services raises no new analytical issues, contrary to what many fear. Thus, it leads to gains from trade (with the standard caveats applicable to conventional trade in goods) and, in specific cases, to income-distribution effects. *Jagdish Bhagwati is University Professor, Columbia University, and Andre Meyer Senior Fellow in International Economics, Council on Foreign Relations, both in New York, New York. Arvind Panagariya is a Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy, Columbia University, New York, New York. T.N. Srinivasan is Samuel Park Jr. Professor of Economics, Yale University, New Haven, Connecticut. We acknowledge helpful comments from Alan Deardorff, Douglas Irwin, Katherine Mann, Lori Kletzer and John Williamson and invaluable assistance from James Hines, Andrei Shleifer, Michael Waldman and, above all, Timothy Taylor. 1
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Table of Contents I. Muddles over the Definition of Outsourcing Categorizing Trade in Services Muddles over Definitions II. How Many U.S. Jobs Have Been Outsourced? III. Analyzing Outsourcing Some Simple Models of Outsourcing Model 1: Gains from Outsourcing in a One-Good Model Model 2: Gains from Outsourcing in the Presence of Trade Model 3: Both Factors Gain Accumulation of Skills Abroad IV. Implications for the United States: Welfare, Jobs, Wages and Dislocation Overall Welfare The Total Number of Jobs Will there be Other High-value Jobs?
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muddles - The Muddles over Outsourcing Jagdish Bhagwati...

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