Preferential trade agreements (PTAs) have mushroomed over the last decades. However, the various forms of bi- and plurilateral arrangements have always been met with the concern that their proliferation might come at the expense of overall trade freedom because of undermining multilateral governance. This paper starts from the fact that international treaties are notoriously difficult to enforce, as is compliance with (trade) agreements. By focusing on the political economy of how cooperation in trade liberalization is ultimately sustained via the threat of retaliation as institutionalized within the World Trade Organization (WTO), the paper illuminates a novel and completely different channel between PTA membership and multilateral trade liberalization. Exploring their interaction with respect to trade freedom, we explain that PTA membership actually improves on the working of multilateral arrangements that are supposed to ensure cooperation in trade liberalization, thus effectively catering to more open trade.

There has been an intense debate as to the effects of offshoring and global value chains on labor, with the debate centering around possible negative employment and income effects for the low(er) skilled in advanced economies. Although sociological and psychological research has shown that income falls far too short when it comes to subjective well-being (SWB), the globalization's impact on SWB has been surprisingly under-researched. This applies in particular to job satisfaction, including of those negatively affected by seeing their real income depressed. Against this backdrop, we sketch out a model that is capable of capturing job satisfaction in conjunction with the income and distributional effects of offshoring. Contrary to a great many beliefs, our theoretical considerations suggest that those remaining employed may be more satisfied with their jobs, even if suffering from increased competition and from more tasks being offshored. Running a cross-section logistic regression model that combines information on offshoring and job satisfaction lends support to our theoretical explanations. Accordingly, job satisfaction is on average rated higher in countries with comparatively high offshoring activities. More disaggregated regressions get to the heart of the matter, which is a change in the characteristics of the remaining jobs. Our results stand up to extensive robustness checks with respect to different specifications, measures of globalization, and even when controlling for many of the usually suspected variables with reference to SWB.

The Doha Round on multilateral trade liberalization, originally intended to better integrate developing countries into the world economy, has been largely considered a failure. With the Doha outcome falling short of expectations, North-South trade remains underdeveloped. Embedding the political economy and the resulting importance of reciprocating trade liberalization in an evolutionary model along Axelrod-Rapoport lines indicates that factor endowments are crucial in triggering trade policies. Their pivotal nature gives rise to bifurcations, thereby tilting policies towards or away from liberalization trajectories. The theoretical insights are reflected in an empirical analysis, thus strengthening the case for a variable-geometry approach.

Studies on EU enlargement mostly focus on its welfare-economic and much less so on its public-choice dimension. Yet, the latter may be as important as the former when it comes to sustain integration. This paper aims at filling the gap by exploring theoretically and empirically how enlargement of multi-level systems like the EU affects satisfaction with democracy. In order to assess the effects of a widening in membership, we present a novel approach that draws on the probability of being outvoted. We find that, given the institutional arrangement, enlargement tends to depress satisfaction with democracy. Our theoretical results are backed by panel-data evidence for six European economies displaying a significant decline in satisfaction with democracy with growth in EU-membership.

While most of the offshoring literature focuses on the effects on relative wages, other implications do not receive the necessary attention. This paper investigates the effects on the industries’ skill ratio. It summarizes the empirical literature, discusses theoretical findings, and provides empirical evidence for Germany. As results show, effects are mainly driven by the industry where offshoring takes place. If offshoring takes place in high-skill intensive industries, the high-skill labor ratio increases (vice versa if offshoring takes place in low-skill intensive industries). Results are in line with other empirical findings, however, they seem to contradict theoretical causalities. Thus, we additionally discuss possible explanations.

The nexus between income and happiness is very much disputed. Many cross-sectional studies seem to be in support of a positive relationship. Yet, the failure of most studies to find a similar link between increases in income through time and happiness in developed countries of the western hemisphere sparked an intense debate over the issue. Starting from the fact that the theoretical basis in happiness research has been comparatively weak, we develop a novel theoretical approach that allows us to identify distributional consequences of unemployment as a key factor in the nexus. Social cleavages rooted therein imply a bias in the social choice between private and public goods with the bias and thus the importance for happiness conditional on the level of per-capita income. Our theory is backed by corresponding empirical evidence in international data: controlling for a number of variables, we find that, in low-income countries, subjective well-being significantly depends on income per capita; however, in high-income countries, the unemployment-related distribution is more important as a determinant, with significance shifting from the level of per-capita income to cleavages associated with unemployment. Our findings thus emphasizes the relevance of the income-satiation hypothesis found in many longitudinal studies also in cross-sectional perspective.

How globalization affects subjective happiness is highly disputed. Several studies use an index that amalgamates globalization’s different dimensions into a single variable. Unlike previous studies and in order to better illuminate its facets, we adopt a disaggregated perspective on trade (policy) data. Distinguishing actual trade flows and the option value of trade, we find the former to slightly depress happiness, the latter to significantly promote happiness. Segmentation of WVS-data shows that the positive connotation is concentrated in low-income countries still in the process of climbing the income ladder, thus backing the notion of a shift in values.

In international relations, short-run incentives for non-cooperation often dominate. Yet, (external) institutions for enforcing cooperation are hampered by national sovereignty, supposedly strengthening the role of selfenforcing mechanisms. This paper examines their scope with a focus on contingent protection aka tit-for-tat in trade policy. By highlighting various strategies in a (linear) partial-equilibrium framework, we show that retaliation of non- cooperative behavior by limiting market access works as a disciplining device independently of supply and demand parameters. Our theoretical results are backed by empirical evidence that countries more frequently involved in WTO-mediated disputes entailing tit-for-tat strategies pursue on average more liberal trade regimes.

While some contributions examine international activities of family firms, there is only little evidence on their international sourcing pattern. An explicit theoretical framework is still missing. This contribution extends the global-sourcing model of Antràs and Helpman and adopts a family-firm's perspective. Due to specific characteristics of family firms, their sourcing strategy differs from that of widely held firms. Results show that family firms engage less in international procurement. If foreign direct investment (FDI) coexists with international outsourcing, family firms investigate less in FDI, whereas their engagement in international outsourcing is ambiguous: a substitution process may work towards an increase in international outsourcing activities.

This paper argues that offshoring indices often measure something different than what we think they are.Using data from input-output tables of 21 European countries from 1995 to 2006 we decompose an offshoring index, distinguishing between a domestic (structural change) and an international component (imported inputs ratio).Regarding offshoring of business services, a large share of the index variation is driven by the domestic component.This is even more pronounced for overall service offshoring.In the case of material offshoring, by contrast, the international component drives the main variation of the indices.Our results therefore show that, regarding (business) services, the typical calculation of offshoring indices tends to over estimate the role of the imported inputs component, neglecting the role played by structural changes in the economy.

In industrialized economies, International Outsourcing is often blamed for destroying jobs and thus, inducing unemployment. Since most contributions examining International Outsourcing assume flexible wages, they do not address these concerns directly. This paper adopts a rigid wage approach and investigates the differences occurring. As theoretical results and the empirical panel data estimations for Germany show, effects depend on industry aggregation, the industry's skill intensity, and the labor market institution. Only in industries characterized by wage rigidity, outsourcing significantly increases low skilled unemployment. Consequently, not International Outsourcing but inflexible labor market institutions instead should be blamed for destroying low skill jobs.

This is Bruegel’s third report on the internationalisation of European firms, and the first one that relies on new, internationally consistent data resulting from the seven-country survey undertaken within the framework of the EFIGE (European Firms in a Global Economy) project. In the first, 2007 report, the happy few, Thierry Mayer and Gianmarco Ottaviano were making the best of patchy, heterogeneous data to show what a better knowledge of firm internationalisation patterns could bring to the understanding of trade performance, revealing things about the behaviour of firms that aggregate trade data simply cannot show. In the second, of markets, products and prices, published in 2009, Lionel Fontagne, Thierry Mayer and Gianmarco Ottaviano were using the same type of data to analyse the effects of the euro on intra-European trade. Again, the approach was promising, but due to data limitations the evidence was partial. It was on this basis that Bruegel, together with the Centre for Economic Policy Research(CEPR) and partners from seven countries, undertook to collect comprehensive and consistent firm-level data. Thanks to generous support from the European Union’s Seventh Framework Programme, and from UniCredit (which pioneered similar data collection in Italy), the EFIGE project was launched in 2009. This report by Giorgio Barba Navaretti, the project co-leader, and colleagues, offers a first systematic analysis of the rich set of data resulting from the survey. Other reports will follow, and a series of working papers is being published (all the material from the research project is available on www.efige.org). The findings summarised in this report are reassuring for researchers: the hypotheses they had formed on the basis of theory and partial evidence are by and large confirmed. As the authors emphasise in the report, the most compelling fact that emerges from systematic comparisons is that firms in different countries behave in a strikingly similar way. To put it in simple words, there is no special gene that explains why Germany exports much more than Italy or Spain. In fact, German firms do not differ markedly from similar firms elsewhere in Europe. Rather, the structure of German industry and especially the density of medium-sized firms go a long way towards explaining macroeconomic differences with neighbouring countries. It is therefore on the basis of strong evidence that research can deliver messages about policy. The main message is that, at a time when most governments have put competitiveness at the top of their agenda, they should first and foremost focus on firm-level development. The key questions for policymakers looking for ways to increase exports are how they can foster growth in the size of existing small and medium-sized firms, and how they can promote the entry of new firms. In turn, actions to this end will help improve productivity, foster innovation and enrich skills. True, all that is easier said than done. But at least it is important to set the right agenda and focus on the right priorities. This reports is a contribution to these ends.

Considering labor market effects of international outsourcing on more disaggregated industry levels, a sector bias appears showing that low skilled labor receives a wage premium when international outsourcing takes place in low skill-intensive industries. However, there is no empirical evidence supporting this pattern. Applying a panel data analysis for Germany, this paper provides new empirical evidence for the existence of the sector bias of international outsourcing: significant results confirm the decreasing wage gap if international outsourcing takes place in low skill-intensive industries. If international outsourcing takes place in high skill-intensive industries, the wage gap increases.

Considering a possible sector bias of international outsourcing within a 2 × 2 framework, four different scenarios appear. The relative high or the relative low‐skill intensive industry can relocate either its high or its low‐skill intensive production fragment. Traditionally, depending on the superiority of either the wage or the outsourcing effect, general equilibrium effects are regarded as ambiguous in two of the four scenarios. In this contribution, I provide a formal approach and a calibration exercise for the German economy. Results show that a focus on the elasticity of substitution can complete the picture. When the elasticity exceeds a critical value, results are unambiguous in all four scenarios, supporting the existence of the sector bias of international outsourcing.

Empirical contributions on service offshoring show less pronounced labor market implications than with material offshoring. Since no formal model exists investigating service offshoring in particular, empirical examinations are not based on properly defined hypothesis. This contribution formalizes service offshoring within a Ricardo-Viner specific factors model. As service offshoring is assumed to expand the range of possible offshoring scenarios, results differ from those of material offshoring. The different scenarios have opposite implications and sum up to marginal effects in the aggregate. This theoretical contribution thus is capable of explaining empirical findings so far and provides clear testable hypotheses for future research.

With interest groups significantly affecting economic performance (according to Mancur Olson) and a vital interest of governments in economic growth and low unemployment in order to win elections, there should be a link between political business cycles and the evolution of lobbies over time which has totally been ignored in the literature up to now. In modeling this link in a theoretical and empirical way we try to answer two questions: Is it possible to interpret Olson´s Law of Interest Groups not only as a long run phenomenon but also in a short-run perspective, integrating it into the theory of political business cycles? And: is there any empirical evidence that a typical pattern of lobby behavior and macroeconomic status exists which is consistent over a couple of election periods? In order to investigate these issues, we first analyze some literature that is usually ignored in the more technical contributions evaluating Olson´s law, but proves to be highly important as background for answering the above mentioned questions. We then illustrate how a model consisting of Olson´s interest-groups theory and the endeavors of governments to win the majority of votes in elections could look like, before we perform a time-series-analysis based on the lobby-list of the German Bundestag in order to gain some more insights into the relationships between lobbies, governments and voters. As a result we discover a consistent behavior of the lobbies over the cycle that boils down to some kind of non-aggression pact between the lobbies and the governments irrespective of their political alignments.