Conditions that prompt trade: c) Possibility of offshoring and outsourcing

The idea

The possibility of offshoring and outsourcing is a major condition prompting international trade. Outsourcing occurs when a business contracts out a process, such as IT support, to a third-party specialist. Offshoring involves relocating a company's own production facilities to a different country to exploit lower costs, such as cheaper labour. For example, a UK brand might offshore manufacturing to Bangladesh to reduce costs. Firms often combine both by offshore outsourcing, hiring a foreign third party. These strategies prompt trade by creating global supply chains, increasing the cross-border flow of goods and services as firms seek to maximise efficiency, reduce average costs, and improve their overall global competitiveness.

What earns the marks

• Define outsourcing as delegating business processes to external third-party providers.
• Define offshoring as relocating business activities to another country, keeping them within the same company.
• Explain that offshore outsourcing combines both, using a foreign third party.
• Identify cost reduction, such as lower labour or raw material costs, as a primary driver for offshoring.
• Explain how offshoring and outsourcing prompt international trade by creating global supply chains and increasing imports and exports of intermediate goods and services.

Common mistakes and how to put them right

• Using offshoring and outsourcing interchangeably.

  Put it right: Offshoring refers to geographic relocation (which can be internal), while outsourcing refers to contracting out to a third party (which can be domestic).

• Assuming offshoring always leads to lower costs.

  Put it right: Offshoring can introduce hidden costs, such as increased transportation expenses, quality control issues, or tariffs.

• Believing outsourcing only applies to manufacturing.

  Put it right: Outsourcing is highly prevalent in the service sector, such as call centres, accounting, and software development.

Exam tips

• Clearly distinguish between offshoring and outsourcing in your definitions to secure knowledge marks.
• Evaluate the risks of offshoring, such as supply chain disruptions or reputational damage from poor working conditions abroad.
• Use real-world examples of global supply chains to illustrate how offshore outsourcing increases the volume of international trade in services.