Offshoring: The Next Industrial Revolution?

Abstract

IN FEBRUARY 2004, when N. Gregory Mankiw, a Harvard professor then serving as chairman of White House Council of Economic Advisers, caused a national uproar with a textbook statement about trade, economists rushed to his defense. Mankiw was commenting on phenomenon that has been clumsily dubbed (or offshore outsourcing)-the migration of jobs, but not people who perform them, from rich countries to poor ones. Offshoring, Mankiw said, is only the latest manifestation of gains from trade that economists have talked about at least since Adam Smith. ... More things are tradable than were tradable in past, and that's a good thing. Although Democratic and Republican politicians alike excoriated Mankiw for his callous attitude toward American jobs, economists lined up to support his claim that offshoring is simply international business as usual. Their economics were basically sound: well-known principle of comparative advantage implies that trade in new kinds of products will bring overall improvements in productivity and well-being. But Mankiw and his defenders underestimated both importance of offshoring and its disruptive effect on wealthy countries. Sometimes a quantitative change is so large that it brings about qualitative changes,