In Defense of Offshoring

Declan McCullagh writes cogently in defense of "offshoring," the topic that got Council of Economic Advisers head N. Gregory Mankiw in such trouble. In addition to the gains to developing countries, McCullagh notes:

Let's not forget that U.S. workers in the information technology industry often benefit from outsourcing. The German company Siemens, which makes electronic and electrical products, employs 65,000 people in this country. Sony Electronics employs 2,000 people in just New Jersey, while Belgium's Agfa-Gevaert Group, one of the world's leading imaging companies, writes paychecks to over 5,000 people in the United States. Spain's Terra Lycos employs 418 people in the United States to run Web sites such as Lycos.com, Hotbot.com, Gamesville.com, Tripod.com, RagingBull.com and Wired.com. And those are only a few examples.

Whole thing here.

Comments

[Pavel]

That's a nice theory when considered in a vacuum where the influence of formal economically interested organizations on state power is completely ignored.

Free trade is a good direction to go, sure. So are world peace, love and understanding. Libbie-dippy is no better than hippie-dippy in this case.

But back here on earth, policies falling under the banner of "free trade" are having good, indifferent and sometimes terrible consequences on individual countries/regions. It really depends. In any case, the influence of global organizations on states, when bad, shouldn't be ignored because "free trade will make it all ok in the end."

[Mark Fox]

joe & Pavel: When disregarding a longer view, one's options are diminished. If we must have free contracts the world over by tomorrow, we'll have to invade everybody. Immediately. Why wait for sanctions or "ethical consumersism" to have their effects when coercion is happening now?

My only non-forceful lever into those coercive situations is to engage in commerce and wait.

How do you (joe) answer your own question without violating what I have imagined are your principles?

[joe]

Write worker protections into trade deals, as was done in Jordan. Use access to our markets as a carrot to encourage ethical practices.

I realize this is not a pure "free market" position, but neither are the labor practices in China, and neither is buying good produced by that unfree labor.

[Kevin Carson]

Right on, joe! (Your first post, anyway--I'm not too keen on the second idea). I'd also add that the U.S. government (and the World Bank) need to stop subsidizing the export of capital through loans and foreign aid to build infrastructure. Same goes for transportation subsidies to those shipping the goods back to the U.S. If it weren't for forced "public" (i.e., taxpayer) investment in the facilities needed to make private foreign investment profitable, there'd be a lot less of it.

Mark Fox:

This isn't a question of the U.S. invading to make foreign governments more worker-friendly. Frankly, I've had enough of uplift and do-goodism from the U.S. government. Whenever you hear the folks around Cheney and Rumsfeld talking about making the world a better place, you can figure there's an Ahmad Chalabi or Halliburton lurking somewhere in the background.

Those anti-worker governments in the Third World aren't there because of benign neglect from Uncle Sam. They're there because of a century of U.S. fraternal aid to death squads and military juntas to make the world safe for ITT and United Fruit Company. As the song goes, "those Washington bullets again."

To take just one example: You know why sweatshop employers are so drawn to Indonesia? Because, until recently, organizing an independent labor union was a criminal offense. For the background to that, you might check out the history of the CIA-backed Suharto coup back in the '60s.

Or another example: sweatshops also find Central America a hospitable environment. What they've done to union organizers and peasant activists down there over the last fifty years, (starting with the overthrow of Arbenz in 1954, right up through the Contras and Salvadoran death squads) isn't pretty. And if you check the resumes of the officers in those death squads, you'll find that an awful lot of them were "foreign exchange students" at a little college at Ft. Benning.

[joe]

nobody, that's a perfectly plausible position from the individual-freedom perspective (well, protecting Americans' freedom anyway). But aren't you basically throwing in the towel on the "outsourcing jobs to China creates greater wealth" argument?

[Mark Fox]

Kevin: Perhaps if the US spent less on foreign intervention, it might ask for less tax, and I could afford to pay a little more for shoes. I would still likely be buying those shoes from Chinese workers who, although uncoerced, would still be working "horrendous hours" in "deplorable conditions" (until they amassed enough wealth to maintain first-world living standards).

Somebody will always complain. And attempt to coerce their morality upon me and the rest of the world through state proxy or terrorism.

If you're not willing to wait for the market to free the people, it becomes a matter of line-drawing to decide which coercions/suffering are tolerable.

joe seemingly leans toward viewing any coercion in the supply chain as tainting the market, making it unfree. My purchase of shoes will somehow always support coercion, if it exists anywhere in shoe production (extrapolating Wickard v. Filburn). I have no absolute-freedom option. Feeling powerless, I will keep buying the shoes I want at the price offered in my local market.

[nobody]

Joe,

I said government shouldn't be regulating trade.
Let individuals decide who they will trade with.
Obviously, citizens of slave states have no such freedom. Do tariffs and embargoes help them? I doubt it.

[isildur]

As an aside, the mention of Lycos is amusing. Lycos/Tripod/etc used to employ substantially more than 418 people in many different facilities across the country when I worked there. Shortly after I left, it was purchased by a group of foreign investors, and substantially downsized. Symptomatic of a failing tech economy at the time, and not really indicative of anything, but at the same time hardly a screamingly good data point in defense of this argument.

[Pavel]

Mark,

Your last paragraph is exactly the kind of attitude I was trying to deplore. Thank you for making it clear.

No the market is never free. That doesn't mean equally coercive everywhere and addressable only by putting faith in "the market" while ignoring your own or your own government's role in it.

[Jason Ligon]

"No the market is never free. That doesn't mean equally coercive everywhere and addressable only by putting faith in "the market" while ignoring your own or your own government's role in it."

If you identify the lack of a free market as a problem, then, yes, the problem is only addressable by putting faith in the market.

What aspects of free trade are so destructive in your estimation?

[Jason Ligon]

"If you take the libertarian perspective of freely-negotiated contracts leading to the greatest efficiency and overall growth, what is to be done about anti-worker market distortions in countries we would like to have free trade with?"

We reduce the number of our own distortions, and let wage pressure build up in those countries. If there is no trade, or restricted trade, we have removed wage pressure and commerce as factors in improving their lives.

[joe]

Mark, in what universe is Chinese labor "uncoerced?" I'd like to move there.

What some people will tolerate for a few pennies off shoes amazes me.

[Jon H]

Siemens recently announced that they're sending 15,000 software development jobs (not call center jobs) to Asia and Eastern Europe, moving them from the US and Western Europe.

http://www.dfw.com/mld/dfw/business/7971313.htm

"Siemens, which is based in Germany and employs about 417,000 people worldwide, will move most of its 15,000 programming jobs out of the United States and Western Europe, said Anil R. Laud, managing director of Siemens Information Systems, the group's information-technology subsidiary in India. About 3,000 of the 30,000 software programmers that Siemens employs worldwide are already in India."

[Mark Fox]

Pavel: You may reasonably deplore the attitude represented in my paragraph. Do you endorse using coercion to correct that attitude (or its effects)?

If so, my middle two paragraphs apply. If not, what would you prefer a person do?

Individually, we move the levers we can reach. One vote has some infinitesimal effect on the policies of the government. One person an even smaller effect on the policies of foreign governments. Buying the inexpensive shoes also has a tiny effect on the global situation, but a noticeable effect in one's daily life. It might even afford a person the time to become a foreign labor rights activist.

joe: Chinese labor is uncoerced in the imaginary universe where trade agreements and political threats have all their promised effects. It is parallel to the universe where wage differential pressures change tyrants into saints.

Whether a few cents on shoes or a few hundred bucks in software or a several thousand dollars on industrial equipment, disapproving amazement seems weak justification for coercive intervention.

[Rick Barton]

if Congress restricted companies from shifting jobs overseas...rivals in Europe, Japan and Korea could employ cheaper workers in developing nations, (making) U.S. companies less competitive...driving down the U.S. stock market, shrinking available capital, and eventually leading to more unemployment than if Congress had done nothing.

Yet, this is exactly what Kerry is proposing........(?))

Instead; if you want more of something make it less expensive. If more domestic production is desired, taxes and the cost of government regulation on it should be reduced. This is a solution that is fair, and that will not harm consumers only to backfire any way.

Also, concern about US jobs is another reason to terminate corporate subsidies that foster over seas employment by US companies. All corporate subsidies should be terminated because they are unfair, of course.

[Kevin Carson]

Mark Fox,

No doubt Chinese workers would still be working for substantially less than Americans, even if their workers-and-peasants democracy ceased to put union organizers in mental hospitals. But it would probably be more than they're getting now. And even now, I doubt their labor is cheap *enough* to offset the increased distribution costs of TNCs if they had to fully internalize their own costs.

To borrow a line from Heinlein, there ain't no such thing as a free lunch. If a form of production isn't efficient or profitable given existing technical capabilities, shifting the costs doesn't make it any more efficient. It just conceals the inefficiency by distributing the two sides of the ledger to different groups of people, enabling one group to live at the other's expense. As Chomsky put it, the cost is socialized and the profit is privatized. What Chomsky failed to realize is that there's no socialize cost except at gunpoint. And that's exactly what government was created for.

[Kevin Carson]

Uh, that should be "no way to externalize costs except at gunpoint."

Duh.

[David Nieporent]

I realize this is not a pure "free market" position, but neither are the labor practices in China, and neither is buying good produced by that unfree labor.

I've argued about this over on Drezner's blog, but the same bait-and-switch keeps appearing over and over again. Protectionists complain about outsourcing IT jobs to INDIA, and then bring up CHINA's slave labor as evidence in support of their complaints.

[Pavel]

What aspects of free trade are so destructive in your estimation?

It simply depends where you're talking about. My entire argument has been that "free trade" in some blanket sense is a useless intellectually lazy ideology. Tearing down government barriers to trade ("barriers" including environmental law and worker's rights as well as just plain old bureaucratic corruption and waste) has had different effects on different places.

Take a place like Ghana, where market erradication of the established powerstructure has breathed new life into the entire country.

Then contrast that with Brazil where, in recent years, a shortsighted all out "free trade" agenda has destroyed the public sector, crippled industry and helped plunge the country into deeper social misery all around.

Is it temporary? Maybe. Will it be cured by less regulation not more? Extremely doubtful.

Anyway, that has little to do with the other issues raised, which I will fall asleep before I respond to. In short, coercive intervention isn't good. But in cases where previous intervention set the stage for disaster, further intervention may be justified. I'm talking about economic more than military, but this is some people's position on Iraq as well.

[Mark Fox]

Kevin: One man's inefficiency is another man's comparative advantage. Technical efficiency is but one factor in the price equation. Geographical distribution of resources is another essential and similarly politically neutral factor. If all costs were internalized, Maine is still a lousy place to grow bananas. Absent trade with more tropical places, a banana-growing Mainer may be able to turn a profit in some amazing automated laborless greenhouse.

Shoes or software are less absurd examples, and since I don't have the time to explore all the input costs and distortions involved, I rely on the market to deliver me the lowest price. Any person or group who claims to be acting with greater wisdom than the aggregate knowledge of all involved parties is likely externalizing the cost of their arrogance onto me.

No matter the ideals under which a government was conceived, that is what the state inevitably does.

[SM]

Here is a rather better argued article than McCullagh's.

http://economist.com/agenda/displayStory.cfm?story_id=2454530

[Rick Barton]

"Brazil... in recent years, a shortsighted all out "free trade" agenda has destroyed the public sector, crippled industry and helped plunge the country into deeper social misery all around."

What, "all out free trade agenda"? Free trade is certainly not the source of Brazil's woes. From the BBC:

http://news.bbc.co.uk/1/hi/business/2380667.stm

Brazil's newly elected left-wing leader, Lula, has consistently opposed any FTAA deal. During his campaing he courted domestic business support, and indeed many Brazilian businessmen are comfortable behind the high tariff barriers which protect their industries.

Brazil hasn't, as yet, commited to any thing close to an "all out free trade agenda."
It would do them good but our government's agriculture subsidies and antidumping tariffs are getting ib the way:

http://www.geocities.com/ericsquire/articles/ftaa/ap031107.htm

[Rick Barton]

"Protectionists complain about outsourcing IT jobs to INDIA, and then bring up CHINA's slave labor as evidence in support of their complaints."

That's a good point. But about "China's slave labor"...If the stuff I buy at Wal-Mart from China is made by people who have as little freedom in selling their labor as say; the workers in the old Soviet Union, then I'm not going to buy that stuff any more. I'm going to get a hold of Wal-Mart tomorrow and ask for some answers and depending on what I am told, some evidence to back up those answers.

I've heard that some workers in China now have wide latitude but I've also heard China's workers referred to as; "China's slave labor". I want to know the status of the workers who make the specific goods I purchase.

If tariffs are low or non-existent we have more choice in goods to buy so that it more easily allows the comunication of the values of a numerical minority, such as concern for the liberty of foreign labor. This is because these vales are more affordably expressed. (taking your business somewhere else) The communication of these values is also enhanced by low taxes and costs of regulation on domestic producers since that allows more choice as well.

[joe]

I agree with McCullagh's point as far as it goes, but it doesn't address one important point. Namely, that not all of the wage differences between the US and other counries are the result of market conditions. In many cases, the places that are "taking our jobs" keep wages artifically low via government force, failing to protect workers from employers' force, and other non-market coercions.

If you take the libertarian perspective of freely-negotiated contracts leading to the greatest efficiency and overall growth, what is to be done about anti-worker market distortions in countries we would like to have free trade with?

[Rick Barton]

Also "trade deals" between our government and other governments should be limited to abolition of tariffs. Any thing else should be left to private companies here and their trading partners, be they foreign companies or foreign governments.

This, among other things, would allow grater leverage for the consumer since the consumer has a lot more pull with companies that depend on his/her patronage than he/she has with the government.

[Jim Walsh]

BILLLLLAARRRRRRRRRP!

(Sound of Pat Buchanan's head exploding...)

[tom wright]

I work for Sony.
Most of those 2000 jobs in NJ are are moving either to India, (tech jobs), or San Diego, (sales and non-tech management functions).

I am back at school, at age 45, to retool as an Oracle DBA. I should be done in 6 months or so.

Anyone need an newly minted DBA in Northern NJ with a decade of diverse IT experience, another 2 decades of even more diverse work experience, and the ability to communicate at more than a 6th grade level which, adjusted for educational inflation, equates to a current MBA level?

Tom

[SM]

1. Not that there's anything wrong with free trade etc, etc, etc.
2. But McCullough's example of european and Japanese firms hiring in the US does not at all represent "outsourcing" as it is happening today. He could just as well have added that Indian & Chinese firms create jobs here, too. But they do so primarily (OK that may not be entirely true) to service the huge American market. They probably do not have to lay off a single person back "home" when they hire someone over here. This qualifies as expansion. To qualify as outsourcing a) the company lays off people domestically while hiring overseas b) the HR department describes the whole thing as "rightsizing" etc & the CEO answers questions when asked about it in double-dutch c) Politicians and talking heads get involved.
McCullough would have been better of just calling it free tade.
3. I am talking about the short term. All kinds of wonderful things can happen in the long term.

[nobody]

Joe,

The answer is to allow individuals to trade with other individuals free of government interference. The purchasing public, if it cares, will decide with their dollars whether those transactions are moral or just. If it doesn't care, it has no right to be outraged by economic principles it has never grasped.

[joe]

Stipulating that Kerry is not sufficiently pro-market for most Reason Online readers, I stand by my statement. The positions John Kerry has articulated on international trade are arguably more pro-market than those of any president or major party candidate in modern history.

Disclose the location of call centers? Yes, it's a government regulation. It also requires about three seconds (it's minimal) and produces a more knowledgeable consumer (for a more functional market). All of your other points are variations of "not far enough."

[Rick Barton]

joe,

I'm dubious.
Has Kerry advocated eliminating US tarrifs? Has he argued for the defunding of the IMF and World Bank which subsidize the international trade of large concerns? As a candidate Bush correctly called the IMF a "bail out for international bankers" during a debate with Gore. (I'm guessing that this sentiment has not been pursued as policy under the Bush regime. I'm guessing just the opposite)

What about the braod scope "trade agreements" that you said Kerry has advocated? When Reagan advocted eliminating tarrifs sans all that other stuff, his position seemed more pro-free trade than Kerry's.

[Rick Barton]

Oh yeah, I forgot. Let's let the market (interplay among purveyors and consumers) decide which consumer knowledge makes the market more ?functional?.

[joe]

"Yet, this is exactly what Kerry is proposing........(?))"

Actually, it's not. Kerry is not proposing a ban on offshoring. He is proposing an end to tax credits for offshoring (making companies decide based on actual market conditions), and the inclusion of labor and environmental standards in trade deals. Given that the former involves countering anti-market coercion, and the latter involves protecting ourselves from other people's externalized costs, I think his position is arguably as pro-market as that of any president or candidate in modern history.

Of course, it's not market fundamentalism, so you might want to vote for the Smurf.

[Rick Barton]

"I think his position is arguably as pro-market as that of any president or candidate in modern history."

Even if Kerry's proposals were confined to elimination of tax rewards for off shoring and the inclusion of labor and environmental standards in trade deals; I don't think that we may regard them as so pro-market since government "trade deals", to the extent they go beyond elimination of tariffs, are explicitly anti-market.

But, Kerry also has proposed the ridiculous requirement that foreign call center workers have to disclose their physical location to customers:

http://kerry.senate.gov/text/cfm/record.cfm?id=215182

This is obviously a punitive proposal and perhaps indicative of the direction Kerry would go in if left to his own devices.

Kerry is a really big spender; an "F" from the NTU, NTU.org I'm guessing that he hasn't been frugal concerning corporate subsidies such as the IMF, World Bank, etc etc that reward larger concerns.

As for the elimination of tax credits for off shoring; a more pro-market reform would be the elimination or at least the reduction of business taxes. (there is no excuse at all for the capital gains tax) Among the reasons, are that large and politically well connected concerns are in a better position than their smaller competition to initiate and take advantage of "breaks".

[Tom Chiarello]

Outsourcing/Offshoring is killing the U.S. Economy. It is creating High Unemployment,
continuing the longest Recession since WW2, and eroding the Tax Base at an alarming pace.

All H-1b Visas and L1-b Visas must be repealed. These laws have legalizing the export of thousands of highly paid 'white collar jobs'
to countries where workers are paid a fraction of America wages and don't pay taxes.

These policies are exporting the 'American Way of Life' and selling out the
'Future of the Next Generation of Americans'.

The last time this policy of Fair Trade was attempted in the United States was back in 1890.
The Fair Trade Experiement ended in 1929 with the Stock Market Crash, Great Depression, and the Banking Panic.
Since then, regulations were legislated into law to prevent against another Economic Collapse of this magnatude
but these regulations have been lifted through De-Regulation Laws in the past 10 years.

And if this megatrend is allowed to continue, another Economic Collapse or Revolution is inevitable.

The New Business Model "Employ Cheap Foreign Workers while charging High American Prices" has already started to fail.
Gains are only seen on Wall Street and the profits never trickle down. CEOs believe 'Greed Is Good' and they practice it
every day when they 'Downsize' their companies, 'Offshore' American Jobs, and give themselves huge bonuses.
Corporate executives never re-invest their companies profits. 'Downward Mobility' will become commonplace in America
in the next 5 years.

CEOs can not control their Greed. Only strong legislation against Offshoring will stop the negative effects of this business practice.
It's call Regulation and it's what existed before Re-Regulation came along.

Unless this is stopped, all Americans in all walks of life will be doomed to working at lower paying jobs at places like 'Home Depot' or 'Burger King'.