Partisan Cycles in Offshore Outsourcing: Evidence from U.S. Imports

29 Pages Posted: 3 Oct 2016

See all articles by Pablo M. Pinto

Pablo M. Pinto

University of Houston

Stephen Weymouth

Georgetown University

Date Written: November 2016

Abstract

The wage and employment effects of offshoring roil politics in the United States and around the world. Firms that offshore either outsource their activities to unaffiliated businesses, or internalize production by establishing subsidiaries from which they import intrafirm. We argue that the political environment in trade partner countries influences U.S. offshoring patterns in ways that have been ignored in the extant literature. Drawing on the political business cycle literature, we expect higher production costs and lower profits for firms in capital (labor) intensive sectors when the Left (Right) is in power. These partisan cycles, in turn, shape the sectoral composition of exports from the partner to the United States, and the degree to which trade is conducted intrafirm. Under a Left‐ (Right‐) leaning government in a partner country, U.S. intrafirm imports of capital‐ (labor‐) goods increase relative to total imports in these industries. Examining highly disaggregated U.S. import data, we find strong support for our argument. Our results indicate that the effect of partisan governments on offshore outsourcing depends on factor intensities of production, which vary across industries. The degree of internalization in global sourcing is shaped in part by the distributional objectives of partisan governments, and not by economic factors alone.

Suggested Citation

Pinto, Pablo M. and Weymouth, Stephen, Partisan Cycles in Offshore Outsourcing: Evidence from U.S. Imports (November 2016). Economics & Politics, Vol. 28, Issue 3, pp. 233-261, 2016, Available at SSRN: https://ssrn.com/abstract=2846188 or http://dx.doi.org/10.1111/ecpo.12078

Pablo M. Pinto (Contact Author)

University of Houston ( email )

TX 77204-3011
United States
7137432540 (Phone)

HOME PAGE: http://pablopinto.com

Stephen Weymouth

Georgetown University

Washington, DC 20057
United States

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