Smart Outsourcing, Dumb Outsourcing
Clyde Prestowitz is the author of Rogue Nation: American Unilateralism and the Failure of Good Intentions. He is also president of the Economic Strategy Institute and was a trade negotiator in the Reagan administration.
Washington — The recent statement by United States Council of Economic Advisors Chairman Greg Mankiw in the president’s annual economic report that outsourcing of jobs abroad is good for the American economy has unleashed a debate in which all sides are talking nonsense.
Political leaders of both parties called for Mankiw’s head and submitted a series of protectionist proposals requiring contractors doing any government-related work to have the work done in the US by American workers. Economists, on the other hand, rushed to Mankiw’s defense, emphasizing that, backward as it might sound, his assertion was exactly right in terms of the doctrine of free trade. Meanwhile, a number of business consultants specializing in facilitating outsourcing attempted to downplay the whole issue by arguing not only that outsourcing is good for the US economy but also that it is really no big deal because only a relatively small number (about 300,000) of jobs have been outsourced to date.
The problem for the consultants is that the eagerness with which they are marketing their outsourcing facilitation services belies the argument that it is a phenomenon of minor significance. In fact, it is a very big deal that is only going to get bigger, with far-reaching implications.
While the debate has recently come to a boil in the context of movement of call centers, back-office data processing and other service jobs to India and other low-wage countries, the outsourcing phenomenon has been gathering momentum for a long time. It really began in the 1950s when US apparel makers began sourcing increasing amounts of their product offering from Hong Kong, Korea and other Asian tigers. A key harbinger for the future was the 1975 decision of Ampex, the American company that then had a complete monopoly on video recording technology, to license and outsource the production of its videotape-recording and VCR production to Japanese companies such as Sony and Toshiba. Within a short time, the Japanese not only came to dominate the business (as Ampex barely survived on royalties from its technology licenses), but they also used it as a springboard to become major players in the production of semiconductors for which VCRs provided a huge market.
In the ensuing 25 years, US manufacturing of both low- and high-tech products moved steadily offshore, with the result that today about 40 percent of the manufactured products sold in the US are produced abroad. Because these imports are not matched by any similar US production of goods or services going to foreign markets, the US now has a trade deficit (technically a current account deficit) of about $600 billion annually. A well-known rule-of-thumb calculation is that every billion dollars of exports creates about 20,000 jobs in the US economy. On that basis, outsourcing can be said to have moved about 12 million US jobs offshore. Even if the number is half that, it is still quite substantial and far above the 300,000 figure currently being cited in many commentaries.
What lies at the heart of the current uproar is, in fact, not so much the number of jobs being outsourced but the kind of jobs. As manufacturing jobs have been migrating abroad for a long time, economists and business leaders argued there was no reason for concern because the US was going to have a services and high-tech economy. None of that sweaty, dirty manufacturing for us, they said. We’re going to do the high-valued-added, sophisticated services and high-tech development. Now, however, it is apparent that millions of Indian and Chinese engineers, software developers and service providers can do all this sophisticated” stuff as well as or better than the Americans at a tenth the cost. Of course, this is not always, or even generally, the case. But make no mistake. It is the case often enough to be a very big deal.
It is particularly important because the impact will far outweigh the number of jobs moved offshore. Even if jobs don’t move, the threat of movement will operate to keep salaries low. Thus all those accountants, lawyers, software engineers, stock analysts, X-ray readers and others who thought their good life was safe and secure are having to think again. And, unlike blue-collar manufacturing workers, these professionals write opeds and talk to politicians. That’s why the uproar has been so strong.
How to respond? Certainly not as the politicians and other protectionists have been urging. Trying to keep work in the US that cannot be done competitively by Americans is costly and ultimately impossible anyhow. Forty years of quotas on textile and apparel imports and emergency tariffs on steel have not prevented the demise of these US industries. Nor will similar measures prevent call centers or software code writing from migrating to lower cost locations. If we can obtain goods and services at less cost from abroad than at home, we should do so. The foreign sellers will then have earnings with which to buy from us the things that we do produce competitively.
On the other hand, we would do well to be wary of the economists who profess no concern over outsourcing because not all outsourcing is the same. The economists assume that outsourcing takes place in response to market forces such as lower labor costs, closer proximity to markets served and more. To the extent this is the case, the economists are correct. But outsourcing frequently occurs in response to market distortions. For example, the government of Japan spent $300 billion over the past year to intervene in foreign-exchange markets to keep the dollar strong versus the yen. This was the equivalent of a $300 billion subsidy to Japanese exporters. China and many other countries frequently offer substantial tax rebates or other financial incentives to attract factories in key industries to their shores. These government interventions have nothing to do with market forces. They amount essentially to the buying of jobs in pursuit of mercantilist objectives that are ultimately destructive to all concerned. The weakness of the economists is that they are never as harsh on the foreign mercantilists as they are on domestic protectionists.
But it is imperative that free trade proponents not confuse mercantilist-inspired outsourcing with free trade. For if they don’t act to stop the mercantilist policies that cause dumb outsourcing, they are likely to get the domestic protectionism that will prevent smart outsourcing.