DP6542 How Remote is the Offshoring Threat?

Author(s): Keith Head , Thierry Mayer , John Ries

Publication Date: October 2007

Keyword(s): distance , gravity , services , trade

JEL(s): F10 , F14 , F15 , F16

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP6542.asp

Advances in communication technology make it possible for workers in India to supply business services to head offices located anywhere. This has the potential to put high-wage workers in direct competition with much lower paid Indian workers. Service trade, however, like goods trade, is subject to strong distance effects, implying that the remote supply of services remains limited. We investigate this proposition by deriving a gravity-like equation for service trade and estimating it for a large sample of countries and different categories of service trade. We find that distance costs are high but are declining over time. Our estimates suggest that delivery costs create a significant advantage for local workers relative to competing workers in distant countries.