On Terms of Trade, Offshoring Ties, and the Enforcement of Trade Agreements

Subhayu Bandyopadhyay, Arnab K. Basu, Nancy H. Chau, Devashish Mitra

Journal of Economic Behavior & Organization, September 2025

Trade

Journal of Economic Behavior & Organization

Devashish Mitra

Abstract

This paper unpacks the role of offshoring in the enforcement of trade agreements. In a two-country model of task offshoring, we show that by depressing demand and thus demand for embodied labor, own-tariff effects on factor content weighted terms of trade are: (i) negative in upstream countries, backfiring on upstream workers, and (ii) positive in downstream countries which render imported labor tasks even cheaper.

This progression in own-tariff effects on terms of trade along the supply chain presents a novel challenge to the effectiveness of dispute settlement rules designed to nullify unwarranted terms of trade gains. The pros and cons of deep trade integration as a remedy, involving well-enforced labor standards both upstream and downstream as an integral part of trade agreements, are highlighted.