View article

In this paper, we study the role of vertical product differentiation in the decision to allocate production between domestic and foreign plants. To do so, we examine the first wave of light-truck offshoring to Mexico that occurred due to substantially lower post-NAFTA trade barriers and a coincident increase in US demand for light trucks. In contrast to the typical assumption, but similar to many other industries, the need for additional capacity was accommodated by investment in both the US and Mexico for the same models of light trucks. Using a new dataset that details the extent of offshoring and domestic production within models, we document sharp differences in how capacity was utilized. Specifically, within models, we find that automakers offshored varieties which tend to be older in design vintage, lower scale, and less complex to produce. In contrast, we find that varieties “inshored” to newer capacity in the US …