ECON6023 · International Trade
Offshoring and Global Production
Week 9 studies offshoring — trade in intermediate inputs and the slicing of the value chain across countries — and its effect on the relative demand for skilled versus unskilled labour, relative wages and job polarisation. This is applied context rather than a core exam derivation: Global Value Chains and the Eaton-Kortum model are explicitly excluded from the final exam, so treat this chapter as discussion and evidence, not algebra.
What this chapter covers
- 01Offshoring / foreign outsourcing = producing stages of a good in different countries (trade in intermediate inputs)
- 02The value chain ranked by skill intensity, from assembly (least skill-intensive) to R&D (most)
- 03Assumptions: low-skill relative wage lower in Foreign; capital and trade costs uniform across activities
- 04The cutoff on the value chain: Foreign does the least skill-intensive activities, Home the rest
- 05Comparative static: a fall in offshoring costs moves the cutoff, raising skilled relative demand in BOTH countries
- 06Skilled relative wage rises in Home and Foreign simultaneously (the distinctive result vs simple HO)
- 07Job polarisation: growth at the top and bottom, decline in routine mid-wage jobs; skill-biased technical change
- 08Gains from offshoring and the terms-of-trade caveat; explicitly excluded from the exam: GVCs and Eaton-Kortum
Slicing the value chain: who gains when offshoring costs fall
- +1The cutoff moves. Lower Foreign trade/capital costs make it cheaper to offshore, so Home offshores more activities and the cutoff moves toward the more skill-intensive end (A → B): a wider range of activities is now done in Foreign.
- +1Average skill intensity in each country. The newly offshored activities are the LEAST skill-intensive of those Home used to do, so the average skill intensity of Home's remaining activities rises. Those same activities are the MOST skill-intensive of what Foreign does, so Foreign's average skill intensity also rises.
- +1Relative demand and wage of skilled labour. Because average skill intensity rises in both countries, the relative demand for skilled labour rises in BOTH Home and Foreign, so the skilled relative wage rises in both simultaneously.
- +1Contrast with Heckscher-Ohlin. Simple HO predicts trade raises the abundant factor's return in one country and lowers it in the other (opposite movements). Offshoring predicts the skilled relative wage rises in both countries at once — the distinctive prediction of the value-chain model.
Key terms
- Offshoring
- Producing different stages of a good or service in different countries and assembling elsewhere — equivalently, trade in intermediate inputs / international fragmentation of production. Ownership (FDI vs arm's-length) is not what defines it.
- Slicing the value chain
- Ranking production activities by skill intensity and splitting them at a cutoff: the least skill-intensive activities go to the lower-wage country, the rest stay home. A fall in offshoring costs moves the cutoff.
- Value chain
- The ordered sequence of activities that make a good, from least skill-intensive (assembly) to most (R&D). Offshoring reallocates a range of these activities across countries.
- Job polarisation
- Employment growth in the highest- and lowest-paid occupations but decline in the middle, because routine mid-wage jobs are the easiest to offshore or automate while non-routine work at both ends survives.
- Skill-biased technical change
- Technological change that raises the relative demand for skilled labour. The competing explanation to offshoring for rising skilled wage premia; studies attribute the shift to a mix of the two.
- Terms-of-trade caveat (offshoring)
- Gains from offshoring can shrink if Foreign becomes more productive in an activity where Home had a comparative advantage, worsening Home's terms of trade — the service-offshoring / R&D concern.
Offshoring and Global Production FAQ
Why can the skilled wage rise in both countries at once?
Because the activities that shift when offshoring costs fall are the least skill-intensive of Home's activities but the most skill-intensive of Foreign's. Removing them raises the average skill intensity of what remains in each country, so both countries' relative demand for skilled labour — and hence the skilled relative wage — rises together. That is different from Heckscher-Ohlin, where the two countries' factor returns move in opposite directions.
Is offshoring examined on the ECON6023 final?
Not as a core derivation. The unit explicitly excludes Global Value Chains and the Eaton-Kortum (2002) model from the final exam, so this material is best treated as applied discussion and evidence — the value-chain cutoff, the two-country skilled-wage result, job polarisation and skill-biased technical change — rather than something to solve algebraically. Confirm the exam coverage on Canvas.
Can AI help me with the offshoring topic?
Yes. Sia can explain the value-chain cutoff, the comparative static when offshoring costs fall, and the job-polarisation evidence, and help you structure a clear discussion answer. It explains the method and checks your reasoning; it does not do graded work, and USyd academic-integrity rules apply.
What is job polarisation and why does it come up here?
Job polarisation is the hollowing-out of middle-wage, routine jobs while employment grows at the high-skill and low-skill ends. It comes up because routine tasks are the most easily offshored or automated, so both offshoring and skill-biased technical change push in the same direction. Studies split the observed wage-structure shift roughly between the two forces.
Exam move
Treat this chapter as a discussion topic, not an algebra topic, because GVCs and Eaton-Kortum are off the exam. Learn the value-chain cutoff story and be able to run the key comparative static — a fall in offshoring costs raises the skilled relative wage in both countries — and to contrast it explicitly with Heckscher-Ohlin. Keep the evidence ready (rising skilled wage premia in the 1980s, roughly half offshoring and half skill-biased technical change, job polarisation) as a short-answer set piece, and note the terms-of-trade caveat on the gains. Confirm exam coverage on Canvas.
Working through Offshoring and Global Production in ECON6023? Sia is AskSia’s AI Economics tutor — ask any ECON6023 Offshoring and Global Production question and get a clear, step-by-step explanation grounded in how ECON6023 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
