How 'Little' Outsourcing Create Large Skill Premium : A Model of North-to-South Manufacturing Outsourcing

This paper develops a general equilibrium model that shows a small volume of North-South trade (i.e. 2% of Northern GDP) can cause the observed rise in skill premium, thus resolving the ldquo;small trade volume paradoxrdquo; in the skill premium debate. We do this by applying the concept of ldquo;trade in tasksrdquo; of Grossman and Rossi-Hansberg (2008) to analyze the nature of North-to-South manufacturing outsourcing. As a conceptual innovation, we carefully distinguish two different implicit assumptions of the HO model: factor immobility vs. ldquo;task inseparabilityrdquo;. We show that outsourcing, as a form of trade in tasks, essentially attains ldquo;task separabilityrdquo; while apparently retaining factor immobility, thus making the traditional HO framework obsolete for analyzing current North-South trade. We argue that this change in the nature of trade calls for new thinking in economics and public policy making