Offshoring Barriers, Regulatory Burden and National Welfare

Subhayu Bandyopadhyay, Arnab Basu, Nancy Chau, Devashish Mitra

Indian Economic Review, February 2023

Devashish Mitra

Economics Department

Moynihan Institute of Global Affairs

Economic Policy

United States

Indian Economic Review

Devashish Mitra

We present a model which considers both the regulatory burden of offshoring barriers and possible terms of trade gains from such barriers.

Non-tariff barriers are shown to be unambiguously welfare-reducing, and tariff barriers raise welfare only when associated terms-of-trade gains exceed resulting regulatory burdens, in which case there is a positive optimal offshoring tax. Otherwise, free trade is optimal.

Welfare reductions from an offshoring tax are more likely with several developed nations engaging in offshoring. We derive and characterize the Nash equilibrium in such a case.