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International Outsourcing, Environmental Costs, and Welfare

Author

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  • Choi, Jai-Young

    (Asian Development Bank Institute)

  • Yu, Eden S. H.

    (Asian Development Bank Institute)

Abstract

We explore the welfare consequences of international outsourcing in the presence of resulting environmental damage in a three-stage model of North–South trade. In stage 1, outsourcing firms in the North (e.g., United States and Europe)cause environmental damage to the vendor country in the South, as exemplified by the People’s Republic of China. But, as its primary goal, the South pursuing economic development is willing to bear the costs of environmental degradation. Moving into Stage II, the environmental deterioration becomes so severe in the South that the vendor country begins to tackle the environmental problem by enacting government regulations. As a result, the costs and, hence, the prices of outsourced goods and services tend to increase for the firms in the North. However, the environmental protection measures undertaken generally fall short of the levels needed to restore the environmental quality acceptable by World Health Organization standards. We present a framework for analyzing the effects of international outsourcing on environment and, ultimately, social welfare in terms of gains and losses under three alternative scenarios regarding no, partial, or full accountability for outsourcing induced environmental damages. The policy implication is clear: to fully resolve the environmental problem in Stage III, the implementation of strong regulations or the fostering international cooperation is desirable; that is, until the environmental costs of outsourcing are fully accounted for by the outsourcing firms in the North. Such firms, however, may react by resorting to insourcing, diversified outsourcing and other strategies.

Suggested Citation

  • Choi, Jai-Young & Yu, Eden S. H., 2018. "International Outsourcing, Environmental Costs, and Welfare," ADBI Working Papers 848, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0848
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    outsourcing; labor-augmenting effect; environmental costs; internalization; vendor countries;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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