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The European Union and Japan have recently launched negotiations about a bilateral free trade agreement as means of economic stimulation, with trade as a driving force to create growth and wealth. Since customs duties are already low, the success of the liberalization process hinges on the potential elimination of non-tariff barriers. The purpose of this paper is to shed light on two possible liberalization scenarios, a less ambitious and a comprehensive trade liberalization. In contrast to classical studies our paper builds on the modern trade literature, accounting for the dominance of intra-industry trade between the two economies and the existence of heterogeneous firms. Furthermore, we model a search-and-matching labor market allowing us to quantify employment effects of trade liberalization. We find that a comprehensive liberalization increases Japanese GDP by 0.86 per cent, whereas the EU only experiences an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, while unemployment is only reduced by a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.

In this paper, we explore the role of trade in differentiated final goods as well offshoring of tasks for inequality both within and between countries. We emphasize the distinction between managerial and production labor. Production labor is assumed to be a variable input composed of tradable tasks, while managerial labor is a fixed, non-tradable input. We use a 2-country model recently developed by Grossman & Rossi-Hansberg (2010b) that highlights trade in production task, driven by Marshallian economies of scale. We analyze country size and relative endowment effects on the managerial wage premium as well as on international inequality measured in income per head. We compare these effects in a world where trade is restricted to differentiated final goods with a world with trade in both final goods and production tasks.

This volume was prepared by Sebastian Benz while he was working at the Ifo Institute. It was completed in December 2013 and accepted as a doctoral thesis by the Department of Economics at the University of Munich. It includes five self-contained chapters. All chapters discuss different implications of the growing importance of trade in intermediate inputs. The first chapter compares the impact of international trade in intermediate inputs (offshoring) on wage inequality in two distinct but similar frameworks. In the first framework the profitability of offshoring is based on increasing returns to scale on the task-level, whereas the second framework relies on differences in relative factor endowments of the two countries involved in offshoring. The second chapter provides a theory of offshoring under imitation risk that explains optimal dynamic adjustments of firms' offshoring decisions and yields two new channels by which offshoring affects wage inequality. Chapter 3 studies the impact of intellectual property rights and of offshoring costs on the rate of innovation and on the offshoring intensity. In chapter 4 I estimate knowledge spillovers through outsourcing relationships between German firms, measured by the number of those firms' successful patent applications. The last chapter describes sector-level input-output relationships in eleven European economies and estimates the importance of international trade in intermediate inputs and internationally mobile capital for the interdependence of output shocks in those countries.

This volume was prepared by Sebastian Benz while he was working at the Ifo Institute. It was completed in December 2013 and accepted as a doctoral thesis by the Department of Economics at the University of Munich. It includes five self-contained chapters. All chapters discuss different implications of the growing importance of trade in intermediate inputs. The first chapter compares the impact of international trade in intermediate inputs (offshoring) on wage inequality in two distinct but similar frameworks. In the first framework the profitability of offshoring is based on increasing returns to scale on the task-level, whereas the second framework relies on differences in relative factor endowments of the two countries involved in offshoring. The second chapter provides a theory of offshoring under imitation risk that explains optimal dynamic adjustments of firms' offshoring decisions and yields two new channels by which offshoring affects wage inequality. Chapter 3 studies the impact of intellectual property rights and of offshoring costs on the rate of innovation and on the offshoring intensity. In chapter 4 I estimate knowledge spillovers through outsourcing relationships between German firms, measured by the number of those firms' successful patent applications. The last chapter describes sector-level input-output relationships in eleven European economies and estimates the importance of international trade in intermediate inputs and internationally mobile capital for the interdependence of output shocks in those countries.

AbstractWe explore the role of trade in differentiated final goods as well as offshoring of tasks for inequality both within and between countries, emphasizing the distinction between managerial and production labour. We extend Grossman and Rossi‐Hansberg (2012), where task trade is driven by external economies of scale, by considering asymmetric endowments. Identifying possible equilibrium patterns of task trade, we find little scope for two‐way trade if endowments are asymmetric. Our numerical simulations identify non‐monotonicities between the level of offshoring and measures of within‐country as well as between‐country inequality.

Am 25. März 2013 haben die EU und Japan offiziell die erste Verhandlungsrunde über mögliche bilaterale Handelsliberalisierungen begonnen. Ziel der Verhandlungen ist es, neben tarifären Handelshemmnissen auch nicht-tarifäre Schranken zwischen den zwei Ökonomien zu eliminieren und den Handel zu beleben. Entscheidungsträger in beiden Regionen erhoffen sich durch eine tiefere ökonomische Integration zwischen der EU und Japan positive wirtschaftliche Impulse für die schwächelnde heimische Industrie. Dieser Beitrag fasst die wesentlichen Ergebnisse einer aktuellen wissenschaftlichen Studie des ifo Instituts zusammen. Die zugrunde liegende Studie quantifiziert mögliche wirtschaftliche Effekte eines ambitionierten Freihandelsabkommens zwischen der EU und Japan.

The European Union and Japan have recently launched negotiations about a bilateral free trade agreement as means of economic stimulation, with trade as a driving force to create growth and wealth. Since customs duties are already low, the success of the liberalization process hinges on the potential elimination of non-tariff barriers. The purpose of this paper is to shed light on two possible liberalization scenarios, a less ambitious and a comprehensive trade liberalization. In contrast to classical studies our paper builds on the modern trade literature, accounting for the dominance of intra-industry trade between the two economies and the existence of heterogeneous firms. Furthermore, we model a search-and-matching labor market allowing us to quantify employment effects of trade liberalization. We find that a comprehensive liberalization increases Japanese GDP by 0.86 per cent, whereas the EU only experiences an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, while unemployment is only reduced by a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.