The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. Our findings indicate that the rise of offshoring is likely to complicate the task of trade agreements for two reasons: first, the mechanism by which countries can shift the costs of intervention on to their trading partners is more complicated in the presence of offshoring and extends to a wider set of policies than is the case when offshoring is not present, and this implies that the agreements themselves must extend to a wider set of policies as well; and second, the underlying problem that a trade agreement must address in the presence of offshoring varies with the political preferences of member governments. As a consequence, the growing prevalence of offshoring is likely to make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules – such as market access, reciprocity and non-discrimination – to help them solve their trade-related problems.

This is the first paper to empirically examine whether the United States ’ use of antidumping and safeguard tariffs, or “trade remedies, ” to restrict imports distorts foreign countries’ exports to third markets. We first develop a theoretical model of worldwide trade in which the imposition of a trade remedy by one country- an antidumping duty or a safeguard measure-causes significant distortions in world trade flows. We then empirically test this model by investigating the effect of US trade remedies on Japanese exports of roughly 5200 commodities into 37 countries between 1992 and 2001. Our estimation of a fixed-effects model of Japanese exports yields evidence that US remedies both deflect and depress Japanese export flows. Imposition of a US antidumping measure against Japan deflects trade: export growth to Japan’s non-US trading partners rises by approximately 12 percentage points. The imposition of a US antidumping measure against a third country depresses trade: Japanese export growth to the third country falls by approximately 30 percentage points.

This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a uni…ed framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the …rst mechanism is ine ¢ cient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our …ndings raise warnings that globalization may have led to ine ¢ ciently large governments.

(Article begins on next page) The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters.

www.eui.eu/Personal/Researchers/Agur/Index.htm

Preliminary draft: Comments welcome, but please do not quote without permission from the authors This paper estimates the short-run impact of an unexpected foreign trade liberalization shock on exporting firms and product-level data from a developing country. The economic environment was created when major importers such as the U.S., EU and China imposed new safeguard trade barriers in 2002 on steel imports deriving from developed countries and implicitly provided developing country exporters an unexpected preferential market access shock of up to 30 % by exempting them from the barriers. We use firm-level data to estimate the differential impact of this trade liberalization shock on Indian steel firms and the products they produce. We provide evidence that Indian firms with historic export ties to these markets responded more quickly to the changing market conditions in order to increase sales, exports and profits. Furthermore, we present evidence of hysteresis – i.e., exports continue to expand even after the termination of the preferential market access conditions via the removal of the discriminatory import restrictions. In terms of firm-level use of inputs, while the Indian firms that produce these preferenced products

This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a uni…ed framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the …rst mechanism is ine ¢ cient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our …ndings raise warnings that globalization may have led to ine ¢ ciently large governments.

and discussions. Staiger gratefully acknowledges financial support from the NSF (SES-0518802). Eduardo Morales provided superb research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.