27 July 2001 • Outsourcing, Competitiveness and Employment. Effects Mapped with a Sector Model of Austrian Manufacturing • Kurt Kratena

In order to generate an exemplary simulation of an "import price shock" consequent to integrating the accession candidates into the EU, the model assumed that import of the 12 products defined would be cheaper by 10 percent; this assumption was based on Baldwin,?Francois and Portes, 1997 ("The Costs and Benefits of Eastern Enlargement: The Impact on the EU and Central Europe"), who expect the real trade costs to decrease by 10 percent as a result of the EU's eastern enlargement. (This decrease of real trade costs comprises direct effects on import prices – import duties, non-tariff trade barriers – and the consequences of keener competition due to a larger number of import competitors.)

Given the intermediate input structure as outlined in the input/output table, lower import prices first affect the prices of purchased materials and services across industries. This in turn affects the relative factor prices at given wages (labour becomes more expensive compared to the intermediate inputs), and causes demand for intermediate inputs to grow and demand for employment to fall.

However, if we consider solely the effects caused by factor demand, we will ignore an important macroeconomic response. The import price shock and shift in factor demand will in turn change the costs and output prices. A decline in import prices by 10 percent means that overall intermediate inputs will be cheaper by 4.4 percent. This decrease in input prices will directly affect output prices, which will overall fall by 4.2 percent. The change in prices for overall demand (–6.2 percent) will range between the reduction of import prices by 10 percent and the respective output price effect. This means a substantial improvement of the terms of trade which provides the foundation for a positive welfare effect in the relevant theoretical models.

Because of the massive import response, the impact on domestic output will be much less significant than the effect on demand and may conceivably be negative in some cases (textiles, clothing and footwear, food, drink and tobacco, agricultural and industrial machinery, non-metallic mineral products). If we assume that additional imports are triggered solely by outsourcing (and not by private demand as well), we get much higher positive effects of cheaper imports on domestic output. In this sense, the simulation experiment described here indicates the maximum possible outflow of domestic demand by additional imports; when imports become cheaper this can in turn be viewed as a positive welfare effect for domestic consumers. On average, the output across the industries considered will rise by about 1.5 percent, and employment will fall by 1 percent. Positive employment effects are found only in transport equipment, and paper and printing products.