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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. GalleryWatch.com 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 GalleryWatch.com 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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