Tariffs, Offshoring and Unemployment in A Two-Country Model

Abstract

This paper develops a two-country model that incorporates offshoring opportunities, and analyses the effects of tariffs under economic stagnation in a liquidity trap that causes unemployment. We find that a rise in tariffs on imports of outsourced goods contributes to an increase in employment by inducing a shift in production, but also leads to an appreciation of the real exchange rate that tends to reduce employment. The effect of real exchange rate appreciation dominates the effect of the production shift, and accordingly employment and consumption fall. The effects of tariff adjustments are reversed, however, when there is no liquidity trap and hence no unemployment. 1 See Davidson et al. (1999), Moore and Ranjan (2005) and Helpman and Itskhoki (2010) for studies on the relationship between trade liberalization and unemployment that include search frictions, but do not consider offshoring opportunities. 2A study close to ours is Hashimoto (2011), who considers offshoring in a stagnation economy and examines the effects of an exogenous change in a Leontief production technology. In this setting, however, tariff policy does not affect offshoring activity, because there is no substitution between home factors and offshoring factors.The Japanese Economic Review 6 This is a non-trivial set-up because labour costs differ between the two countries. Even if we incorporate an opportunity for offshoring by foreign firms, the implications of the model remain mostly unchanged.The Japanese Economic Review P P satisfy 9 We assume that households have access to international bonds. Enders and Mueller (2009) discuss the implications of different international asset market structures for the transmission of technology shocks.

A simple aggregate demand analysis with dynamic optimization in a small open economy

“…There are open-economy extensions of the dynamic stagnation model, e.g. Ono (2006Ono ( , 2007Ono ( , 2014Ono ( , 2018, Johdo and Hashimoto (2009) and Hashimoto (2011Hashimoto ( , 2015, but they use a two-country setting and have much more complicated frameworks. The present analysis treats a small country case and has a simple structure comparable to the Mundell-Fleming model.…”

A North–South model of outsourcing and growth

“…In a North-South model of directed technical change, Acemoglu, Gancia, and Zilibotti (2015) and Chu, Cozzi, and Furukawa (2015) investigate the effects of offshoring on skill-biased technical change. Hashimoto (2015) analyzes the impact of tariffs in a two-country model with offshoring and labor market imperfections. In these models, the share of outsourcing or offshoring within total inputs is endogenously determined.…”

Aggregate demand deficiency, labor unions, and long‐run stagnation

“… There are many studies that extend Ono's model. For instance, an early study is Matsuzaki (), and a recent one is Hashimoto (). …”