What Politicians Don't Know About Outsourcing

Trade makes our lives better.

It's a familiar story: A manufacturing company finds its wages too high, looks for ways to cut costs and ends up moving production overseas where the pastures are greener. It happened when some American jobs were outsourced to China. Now it's happening again -- with Chinese jobs fleeing to America.

This trend, known as "reshoring," has created some 10,000 positions in the United States in the past two years. It's driven partly -- believe it or not -- by the rising cost of Chinese labor. And it's only going to expand.

India has the same problem as China. Once the world capital of English-language call centers, it has been eclipsed by the Philippines -- where wages are slightly higher but locals speak an American style of English.

Outsourcing is a fact of life in the modern age, unless you live in North Korea, which is fortunate in having no private jobs to be moved. Relentless, unforgiving competition drives companies to locate where they have the best chance to survive and prosper.

Sensible leaders understand corporate mobility and make their peace with it. But in the U.S., each of the major party presidential candidates is pretending that outsourcing is a grotesque abuse that occurs only because of his opponent's heartless irresponsibility.

Barack Obama blames Mitt Romney because Bain Capital shipped jobs abroad -- a claim that FactCheck.org found baseless. Romney accuses Obama of sending stimulus funds to companies that produce overseas -- a charge dismissed by The Washington Post's Fact Checker.

That's one problem with the war of allegations. The other is that they reflect and promote an erroneous assumption: that outsourcing to other countries is something to be opposed at all costs. In fact, it's a vital part of international trade, which in turn is an immense boon to human progress.

Many Americans fear that every job moved beyond our borders constitutes a grievous loss to our economic welfare. But if something can be made cheaper elsewhere, the relocation will allow us to buy that product at a lower cost, which is entirely desirable. We don't improve our material well-being by depriving ourselves of the chance to get more goods for less money.

We don't actually lose jobs when a company decides to take its manufacturing elsewhere. A recent study of the U.S. published by the Centre for Economic Performance at the London School of Economics and Political Science found, "Offshoring has no effect on native employment in the aggregate." It destroys some jobs but creates just as many others.

Nor is it exactly optional. If clothing can be made far cheaper in China than in South Carolina, a company with plants in South Carolina can do one of two things. It can move its production to China to take advantage of the lower costs, or it can dig itself a grave and then climb in.

A company that successfully outsources saves jobs -- since a company that goes bust employs no one. If Bain had barred corporations from shifting factories when it made sense to do so, it would have been guilty of economic malfeasance.

Outsourcing, contrary to myth, has not led to the collapse of American manufacturing. In fact, U.S. industrial production has risen by nearly 50 percent in the past 15 years. The reason manufacturing employment has declined is that workers have gotten more productive -- meaning it takes less labor to make more goods.

But outsourcing is a two-way street. Nobody here seems to think the German government should stop Volkswagen from building cars in Tennessee. Some 700,000 Americans work for U.S. affiliates of Japanese companies, which apparently is cool with Japanese politicians.

Dartmouth economist Douglas Irwin points out that the U.S. has a trade deficit in goods but a trade surplus in services. Chinese companies, and U.S. companies that operate in China, often need the services of lawyers, architects and software engineers working on this side of the Pacific. In the end, both we and the Chinese gain from the process.

But it's the nature of our politics to ignore the vast benefits generated by international commerce and obsess about every negative consequence that can be found. Romney and Obama both manage to convey the impression that they have no clue how trade acts to continually raise our standard of living.

 Luckily for us, they don't have to understand it. But it would help a lot if they would stay out of the way.

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  • Restoras||

    I can't tell if that picture is of a real place or is the latest train set from Lionel, "Bordertown".

  • NeonCat||

    I'm pretty sure North Korea has outsourced growing food.

    US Manufacturing is up by using machines instead of workers. People seem to still think that manufacturing is good work that will employ lots of people - well, I've worked in a light industrial assembly line setting. It was exhausting, boring, the wages were terrible and since everyone except the heavy equipment operators were temps management could and did treat us like crap. The temps put up with it because it was still better than being unemployed.

    The Chinese, I've read, prefer not to use machines because an exhausted worker is one that can't cause trouble for the govt.

    And if you want to give an American a textile job, Pointer Brand will be happy to take your money.

  • T||

    Capex versus opex. No sense in investing a lot in capital equipment in China when the government can take it all on a whim.

  • cherokeejack||

    dissatisfied workers eventually stop complaining or work to get better jobs in other companys/industries.

  • T||

    If 'outsourcing' didn't exist, I wouldn't have a job. The equipment we make goes all over the world. If those other countries didn't outsource the buying of oilfield capital equipment to the US, the city of Houston (and me) would be screwed. But it goes around. We buy lots of major items from overseas.

    Jesus, didn't we put this mercantilism crap to rest in the 19th century?

  • ||

    Jesus, didn't we put this mercantilism crap to rest in the 19th century?

    Apparently not, since the jackholes advocating it seem to be supported by millions. Thank God for informed electorates!

  • cavalier973||

    *Jesus, didn't we put this mercantilism crap to rest in the 19th century?*

    Hardly. Mercantilism has two proponents: the businesses who would benefit, and the rubes who fall for nationalist propaganda.

    By the way, did you know that Free Trade is anti-private property?

    http://voxday.blogspot.com/201.....ights.html

  • Tejicano||

    Brain dead false logic. This reasoning assumes that free trade is forced on people without their consensus.

  • cavalier973||

    Of course it is (brain dead false logic). Mercantilism is an emotion-based stance pretending to be sober economic theory.

    I find that most people who oppose free trade do so because they hate Mexicans (or Chinese, or whomever happens to be in the public eye at the moment).

  • ||

    every1 deservs minamum wagiz!

    http://www.city-data.com/forum.....tates.html

  • MoreFreedom||

    You are correct that everyone deserves the minimum wage. However, the minimum wage has always been and will always be a big fat zero.

    On the other hand, if they want to earn money, they need to create value, unless the government gets involved. E.G., George Kaiser got $500 million from us, thanks to Obama, for Kaiser's work creating Solyndra which was started around 2008. Or should I say he got the money for his campaign contributions to Obama?

    American's didn't earn anything from this "investment" (maybe I should call this a government handout for campaign cash), instead it cost them plenty.

    Too bad, unlike real businessmen, Obama didn't invest a few million of his own money in the loan, or have his own wealth used as collateral for the loan.

    It'd be a good idea that politicians promoting a loan for a company, be required to provide collateral for any government guaranteed loan, then there will be less of them that are failures.

  • Ken Shultz||

    Economics is interesting as a discipline for a number of reasons.

    Other disciplines have "founding fathers", who raised questions that ultimately may have sparked the existence of the whole discipline.

    Some of these founding fathers haven't fared well over the years. Freud, for instance, didn't hold up well; critics of Chomsky's Universal Grammar aren't going away any time soon...

    Then you've got big thinkers who've weathered the years well. It looked like we might have to disregard Einstein for a while, recently, and while Darwin may have been off on an observation or two, not buying into Darwin's central theories is widely seen as the very definition of willful stupidity.

    I suspect Adam Smith may stand alone in this regard--he's the only founder of a discipline I can think of, whom modern people continue to disregard, despite him being as right as could be for all of 235 years.

    I swear, people who "believe in" Darwin but don't believe in Adam Smith are worse than creationists--because they should know better.

    At least the creationists have a Bible! People who disregards Adam Smith and Free Trade have nothing to stand on at all.

  • JoshSN||

    Adam Smith wrote that business people couldn't get together for dinner without the customer getting screwed, and that business people seek to deceive and oppress the rest of the people, and have deceived and oppressed them.


    To widen the market and to narrow the competition is always the interest of the dealers... The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted, till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

    By the way, that's how the Wealth of Nations ends. His final thought on the subject.

    So, if there is anyone who has forgotten Adam Smith it is the libertarians, who think business is the best thing evar! More! Cheaper! Faster!

  • Kroneborge||

    But as long as the free market is operating that doesn't happen. A business would like to be able to control the market but can't, unless they engage in anti-competitive practices.

  • JoshSN||

    There has never been a time in the history of the world where the scenario you describe has occurred.

    You are like a Communist, saying "But it's never really been tried!"

  • JoshSN||

    Sorry, that's not what Adam Smith is saying. He is saying it happens as long as their are business people and there is a public, to varying degrees, to be sure.

    Their interests include deceiving and oppressing the public and so they have both deceived and oppressed.

  • TomB||

    Josh, did you even read the quote that you posted?

    "any new law or regulation"

    So what part of that have libertarians forgotten?

  • JoshSN||

    The part where the interest of business people isn't the interest of the public, and that business people seek to deceive and oppress the public, and who accordingly, upon many occasions, both deceived and oppressed it.

    Libertarians celebrate business above the public.

  • cavalier973||

    Protectionism reduces competition in the marketplace, which necessarily means fewer, more expensive, and less quality goods. In other words, Protectionism lowers the standard of living generally.

  • MoreFreedom||

    JoshSN points out a problem with government meddling in business and the free market, not a problem of the free market.

    Certainly there are miscreants who'll use government to steal for them, by getting laws passed that fatten their wallets (subsidies, restrictions on competition, price supports, etc.). This takes government force, Instead we could have free markets disciplining colluders which occurs when new entrants undercut the colluders, to consumers' benefit.

  • gaoxiaen||

    The Communist Manifesto?

  • Mykeuva||

  • rts||

    Nobody here seems to think the German government should stop Volkswagen from building cars in Tennessee.

    Please correct me if I'm wrong, but don't the Germans and Japanese build cars in North America to avoid (or workaround) various levels of protectionism, or threats of protectionism?

  • cherokeejack||

    not protectionism just leveling the playing field for a white, eventually competition moves all workers salaries but it can takes lots of years.

  • cavalier973||

    Actually, I would say that it is to be closer to their customers; to hire a younger, less expensive workforce (notice how many Japanese plants are built in the "right to work South"); and to reduce overall costs (transportation, maintenance costs, etc.).

  • cavalier973||

    Japanese land is scarcer than U.S. land; perhaps the Japanese have found better use for land that formerly housed car manufacturing plants.

    But I would agree that avoiding some of the taxes and such might be part of the reason (do we have free trade agreements with Japan? I'm too lazy to look that up right now).

  • NotSure||

    Would any of these protectionists want to pay double for a computer, socks, orange juice etc. I don't think so, until they do, they should shut the fuck up.

  • lightning||

    Ah, my great pet peeve. I agree with the author that "outsourcing" by itself is not to blame for unemployment. Our politicians decided long ago to wage war on the middle class through taxation and taking away our international competativeness in this arena. Although outsourcing doesn't decrease jobs, how many more jobs would we have if we instituted a flat tax, got rid of public sector pensions, and made government spend no more than it takes in (except in times of war)? I am sick and tired of people not respecting the trades. People who build stuff often are not suited for the "new jobs created by outsourcing". Jamming them into college and having them take jobs they are not suited for will simply continue to make us less competative in the future. We can compete with China, unfortunately, there is no political will to become more competative.

  • cherokeejack||

    I'd like to see somebody dispute his argument, I'll bet you can't do it.

  • TomB||

    But, foreigners is bad, mmkay?

  • JoshSN||

    Imagine Country X exists, and people have no good sense of what is going on inside Country X. Country X has found a way, using technology, to radically reduce the costs of slavery. Using GPS and exploding collars with 2048 bit electronic key locks, combined with just the bare minimum of monitoring personnel, Country X has driven the cost of labor to new lows.

    According to Steve Chapman, we are all better off if American companies start using Country X labor to produce our goods, because the price of goods will go down.

    Isn't that what you are saying, Steve?

  • TomB||

    Josh,

    You're assuming that such a situation would successfully yield cheap, yet productive labor (and how did similar--though much less draconian--tactics play out in the USSR, North Korea, Cuba, etc?).

  • ||

    Country X has found a way, using technology, to radically reduce the costs of slavery... According to Steve Chapman, we are all better off if American companies start using Country X labor

    Right, because that was totally what we were talking about. Slavery = free movement of capital and labor.

    Don't forget:

    SOMALIA! ROADZ! CORPORASHUNZ! TEH CHILDRENZ!

  • Kroneborge||

    Free trade is great if it goes both ways. But giving access to our markets when it's not returned is not a good bargain. Letting other countries get away with currency manipulation is not a good bargain. Letting other countries steal intellectual property is not a good bargain.

    Yes let's promote FREE trade, but it needs to go both ways.

  • cavalier973||

    Yeah! If other countries' governments are screwing over their own citizens with high taxes and lower standards of living, then we need to have our government screw us over! Otherwise, it wouldn't be fair to us!

  • Kroneborge||

    Reading comprehension fail. I didn't say anything about taxes or standard of living. I said that when we open up or markets it should be recipricated by the other countries. It's not FREE trade if it's only on one side.

  • cavalier973||

    And I agree! If other nations' governments raise taxes (in the form of tariffs and import quotas) on their citizens, then by golly our government should do the same to us, so that the other nations won't have an unfair advantage over us!

  • cavalier973||

    And I agree! If other nations' governments raise taxes (in the form of tariffs and import quotas) on their citizens, then by golly our government should do the same to us, so that the other nations won't have an unfair advantage over us!

  • cavalier973||

    And I agree! If other nations' governments raise taxes (in the form of tariffs and import quotas) on their citizens, then by golly our government should do the same to us, so that the other nations won't have an unfair advantage over us!

  • cavalier973||

    Want me to say it again?

    (lousy server....)

  • Kroneborge||

    Let's go back in time and think about comparative advantage and free trade. Country A has an advantage in making wine, Country B in making cars, each specializes and trades and they both end up better off than if no trade had occurred.

    But what happens if Country A makes both the wine and cars? What if country B has nothing to trade?

    Long term trade imbalances don't work, any more than you can have half a country do all the producing and the other half do all the consuming.

  • cavalier973||

    If country B has "nothing to trade", then what good is it for country A to erect trade barriers against it?

    But your original example (country A makes wine, country B makes cars) seems to deal with absolute advantage, not comparative advantage. Comparative advantage takes the proposition that country A is capable of making more of both cars and wine than country B, but that the people in country A benefit if they make just one product, and trade what they don't themselves consume to country B for the other product.

    Think of a lawyer who types 100 words a minute flawlessly. It still makes sense for him to hire a secretary, and allow him to focus on pursuing legal work.

  • Tejicano||

    The Japanese are willing to take the trade off of losing manufacturing jobs to be able to keep the engineering and overall business management of the company while keeping control of the profits. Besides, it reduces the cost of transporting the goods to the market. Cars made for the US market are quite different from those made for the Japanese market anyway.

    Besides, they have managed to keep a lot of the key skilled jobs like tool and die makers. So you could say their off-shoring practices have been strategically managed. Yes, there are fewer blue collar jobs in Japan than there were 25 years ago but just about all of their industrial giants - Toshiba, Mitsubishi, Sumitomo, IHI, and the auto makers - are still in the game.

    China is almost a nest of ants by comparison. There really are no major players there - just a really long line of medium and small ones. One the one hand this may be more adaptive but on the other it lacks a coordinated center to drive any direction more than the iterative, day-to-day pull of events. And they are completely dependent on offshore investment - if that dries up they will collapse.

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    allegations. The other is that they reflect and promote an erroneous http://www.ceinturesfr.com/ceinture-bally-c-9.html assumption: that outsourcing to other countries is something to be opposed at all costs. In fact, it's a vital part of international trade, which in turn is an immense boon to human progress.

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