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The politics of outsourcing
By Caroline G Cooper

These days it seems that almost every political analyst in Washington is writing about the "growing phenomenon" of outsourcing US manufacturing and service-sector jobs overseas. Although outsourcing is not new and has been going on for decades, the issue has garnered much political attention in the past year in large part because manufacturing job losses were so great.

In recent months, the negative political rhetoric on outsourcing has focused more on job losses in the services sector, especially in the information technology (IT) industry - a driving force behind America's renewed economic growth. The reasons are twofold. First, politicians claim that IT jobs are being shipped overseas in droves, and subsequently the US is losing its technological edge; and second, US consumers are not happy with the customer service they receive from foreign call centers. reports that in the next 10 years, researchers predict that nearly 5 million US service-sector jobs will be shipped overseas.

That many Americans are concerned about the increase in outsourced US jobs is understandable; they want to ensure that skilled employment opportunities are not taken away from future generations of Americans. But an analysis of the current political debate on outsourcing and some proposed policy solutions reveals that politicians are more concerned about the politics of outsourcing than they are with the economics of the issue. Politicians should avoid prescribing short-term political fixes to what could become a longer-term economic problem.

Deconstructing the political debate on outsourcing
As political interest in outsourcing has grown, so has the debate. In essence, three schools of thought on outsourcing have emerged representing the interests of the far right, the far left and centrists.

The administration of President George W Bush and conservatives in general represent the far-right school of thought on outsourcing. They argue that outsourcing jobs is not an economic problem; rather, it is a boon for the economy, as shipping low-skilled jobs overseas enables US companies to reinvest in the economy and create higher-skilled jobs at home.

The administration's position on outsourcing was outlined in the Economic Report of the President released last February. In the report, US officials downplayed the contribution of outsourcing to job losses by finding that the decline in manufacturing jobs last year resulted in small part from the transfer of low-skilled manufacturing jobs abroad and more to rising demand for workers in the services sector. Shortly after the report was released, Gregory Mankiw, chairman of the Council of Economic Advisors, received harsh criticism for his widely reported characterization of outsourcing as beneficial for the US economy.

US business groups have defended the administration's position on outsourcing, claiming that too few facts and too much rhetoric have played into the political debate on the issue. In the April edition of Asia Insider, Thomas Donohue, president and chief executive officer of the US Chamber of Commerce, outlined a number of "Facts About Outsourcing". Donohue argued that US job losses were associated more with increases in productivity and slow growth in the economy than outsourcing. He opined that the biggest threat to future employment is a shortage of workers - not jobs, and that future jobs will not be created by protectionist policies. Donohue disavowed the notion that outsourcing IT jobs is causing the US to lose its technological edge, and he pointed to experts' opinion that jobs sourced overseas "amount to a small fraction of [the United States] workforce".

On the last point, Donohue was proved correct. A report published in June by the Department of Labor, Bureau of Labor Statistics on extended mass layoffs associated with domestic and overseas relocations determined that in the first quarter of 2004, only 4,633 jobs of the 239,361 jobs lost from layoffs were due to the movement of work overseas.

Donohue's arguments point to the fact that while outsourcing may not be an immediate economic problem, preventing it from becoming one in the future requires that politicians reduce their political rhetoric and enact the right policies. According to Donohue, the right policy mix would encourage the government to "open markets and enforce trade agreements; improve the skills of our workforce and expand the labor pool; modernize our transportation, energy and technology infrastructure; and reduce the legal, regulatory, tax and health-care costs".

Analysts from the Progressive Policy Institute (PPI) correctly argue that the second school of thought on outsourcing, as advocated by far-left Democrats, emerged in response to the Bush administration's inattention to the issue and suggestion that cutting taxes will keep businesses at home. In reaction, left-leaning Democrats have introduced legislation, at both the state and federal levels, that "inspires a retreat from globalization", according to PPI head Will Marshall.

A survey of legislation on outsourcing compiled by and MultiState Associates Inc shows that members of the second school of thought want to restrict companies from sourcing work overseas in two ways: by protecting labor interests and by protecting consumer interests. One notable example of legislation proposed to protect labor interests is an amendment offered by Democratic Senator Christopher Dodd to S 1637, the American Jobs Act.

Dodd's amendment would preclude the federal government or any state government from receiving federal funds for a specific project to outsource federal contracts overseas. One example of a bill introduced under the guise of protecting consumer interests is HR 4366, the Personal Data Offshoring Protection Act of 2004, sponsored by Democratic Representative Edward Markey. HR 4366 would preclude companies from sourcing work overseas that involves a consumer's private information without prior notification to and consent from that consumer. This is required for countries that do not have adequate privacy-protection laws. Although a number of state governments have proposed, and in some cases passed, outright bans on the outsourcing of US jobs, no such legislation has been approved by either chamber of the US Congress.

On July 20, PPI introduced a new policy paper on "Meeting the Offshoring Challenge", hoping to shift the debate on outsourcing to the center and create a third school of thought on the issue. Although PPI is affiliated with the New Democrat faction of the Democratic Party, many of the policy proposals advocated by the organization are endorsed by centrist members of the Republican Party and many businesses. PPI's Robert Atkinson promotes the following three-pronged strategy to confront the outsourcing challenge:
  • Boosting innovation and workers' skills by providing federal funding and tax credits for research and development, promoting education and training programs that emphasize math and science, and easing immigration restrictions on PhD graduates in those fields.
  • Leveling the playing field on trade by eliminating currency manipulation, enforcing US trade agreements and opening markets, and encouraging US companies to stay home by eliminating offshore tax shelters; and empowering US workers by requiring companies to give advance notice that jobs will be outsourced, extending trade adjustment assistance to workers in the services sector, and providing wage insurance, to name a few.

    Finding the right solution
    As the debate on outsourcing enters the realm of presidential politics, it is important that both candidates, Bush and Democratic Senator John Kerry, put aside their personal politics and consider the economic facts associated with outsourcing before recommending policies to address the issue.

    First, outsourcing jobs does not pose an immediate threat to America's economic growth. The data conclude that fewer jobs have been lost to outsourcing than predicted; however, without the right policies to promote better math and science education, foster innovation, and reduce some labor costs at home, more jobs could be lost in the future, and America's competitive edge could begin to wane.

    Second, consumers continue to demand quality, low-cost goods, many of which are produced overseas. By restricting trade to curb the outsourcing of US jobs, consumers would be deprived of product choices, and in turn, economic growth in developing countries could be threatened. At the same time, companies must not sacrifice quality in terms of the products they make or services they provide just for cheaper factors of production. The right policy mix will ensure that consumers continue to have quality, low-costs goods and services produced both at home and abroad.

    Both candidates must face facts to confront future economic challenges associated with outsourcing effectively. If Bush is elected to another term in office, he must not dismiss the notion that outsourcing high-skilled jobs could have a negative impact on the US economy in the long term. If Kerry is elected president, he must consider a more balanced policy approach to outsourcing, not one that aims at restricting trade.

    Caroline G Cooper is a lawyer with Willkie Farr & Gallagher LLP. This article reflects the views of the author, and is not an expression of views on behalf of Willkie Farr & Gallagher LLP or KWR International, Inc.

    (KWR International Inc, a New York-based consulting firm specializing in research, communications and business development services for the public and private sector, with a special emphasis on the Asia-Pacific region. Visit the site.)
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