The U.S. Economy vs. Outsourcing in the Long Term

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Table of Contents

Introduction
Benefits of Outsourcing
Politics in the Debate
Advantages through Globalization
Conclusion
Works Cited

Introduction

Outsourcing has remained a hot topic in US economy chiefly due to the persistent high unemployment rate and poor state of economy. Pundits have thus waged debates on the merits and demerits of outsourcing often rancorously.

Proponents of outsourcing point at the reduced costs of production and possibilities of added returns to the economy while opponents decry the loss of American jobs to far off countries as their families continue to languish in poverty. Outsourcing has been commended for being rewarding, competent, industrious and tactical. However it has been described as immoral, cruel; abuse of the needy, while devastating societies and economies alike.

Benefits of Outsourcing

Despite official statistics indicating greater benefits of outsourcing and globalization, Mandel (n.p.) argues that outsourcing of the manufacturing jobs to such destination like India and China is more harmful to the US economy than any possible benefits derived from it.

According to Mandel, outsourcing also means that typical American wage bill registers minimal growth due to the pressure for jobs and threat of off shore shift for the production units.

Thorough investigations by the BusinessWeek magazine outlines how the Bureau of Labor Statistics (BLS) has being quoting erroneous economic statistics on yields from the manufacturing zones actually conducted outside the country as if emanating from the US, hence giving flawed GDP figures.

The BusinessWeek‘s study of the import price statistics disclose off shoring to low-priced nations is in reality generating “phantom GDP” accounts – approximated at $66 billion thus negating any real domestic outputs as confirmed by the Bureau of Economic Analysis (BEA) charged with assembling the statistics (Mandel n.p.)

According to Chapman, the loss to the US economy due to outsourcing is reflected in the approximately “$2.2 trillion in untaxed profits” by the corporations that translates to about “$800 billion in lost tax” (n. p.). In 2006, the corporations were permitted to inject the funds back to the US at a rate of 5-1/4 percent duty which Chapman argues could lead to a loss of $1 trillion in levies to the public as opposed to the standard rate of 35 percent if applied again.

The existing statutes and taxation policies branded “territorial taxation” only allows international corporations to be just taxed in the country of operation thus leaving windows of opportunity for firms to register in tax havens like the Cayman Islands, devoid of any corporate levies. Chapman thus argues that this inopportune policy only encourages large corporations to seek off shore destinations to the detriment of American jobs.

Politics in the Debate

While US unemployment figures maintain an all time high, Wolverson and Gardner quoting Congressional Research Service statistics describes how employment by US firms in China has grown by a staggering 153 percent from 2003 to 2008. Nonetheless the authors still assert that despite the disparate foreign investments by US firms, the revenue growth results in increased growth domestically as the funds are reinvested in the country.

Thus Wolverson and Gardner maintain that the proposals for corrective levies on US multinationals are political since the linkage concerning tax guidelines and employment is rather shaky. The heavy tax rates (39 percent) within the US have also being linked to the impetus for corporations shifting operations offshore when compared with other OECD countries’ average of 27 percent or with the negligible levies applied in Ireland.

Corporations thus result to tax-evasion tactics by registering their businesses in “tax havens” where corporate taxes are non-existent while others apply “tax deferrals” measures whereby US corporations are allowed to delay payments to domestic firms as they retain earnings under foreign registered affiliates.

The trend in outsourcing and offshoring are irreversible thus the sooner the American public comes to terms with corporations seeking to keep afloat by sourcing cheaper labor the better. Conventional business models are simply unworkable in contemporary globalised market economies.

Citing the case of Japan which faced the same dilemma in the 1990s when it manufacturing sector collapsed due to elevated cost of production and had to relocate these units to China, Dwivedi argues that for American firms to remain competitive and relevant in the current mode, outsourcing is inevitable.

The customary advantage of American firms attracting the best workers from all over the globe has now been eroded as corporations seemingly relocate to tap the creative minds at their source as exemplified by IT firms settling in India and the Philippines. Dwivedi has developed a framework that he alleges can assist firms apprise their options vis-à-vis the need for offshore or outsourcing prior to relocating business units (figure: 1).

Figure 1

framework for business model diagnostic

Mann (282) has additionally outlined some advantages inherent in outsourcing particularly in the macroeconomic sphere. Giving the examples of IT hardware innovation which has seen components outlay reduced tremendously; she argues this has been made possible by the infusion of fresh ideas from the offshore centers.

The division of the business units to enable corporations capitalizes on the diverse cheaper production centers have enabled production expenses to greatly reduce in what Mann calls “the fragmentation of production and international division of labor” (299). Businesses also gain with higher skills for employees and new models injected as lowered expenses bring better yield while taping into the overseas markets also opens fresh markets for US firms (Mann 309).

Drezner alleges that most opponents of offshore outsourcing initiatives by US firms are typically playing politics and literally ignore the underlying factors forcing corporations to seek external expansion.

This debate often heats up throughout the presidential elections year as politicians seek political capital from low employment alleging the trend in offshore relocations as the cause of declining levels of new jobs. A statement by Gregory Mankiw, the leader of President Bush’s Council of Economic Advisers that “outsourcing is just a new way of doing international trade” incensed a House Small Business Committee hearing in October 2004 (Drezner n.p.).

Advantages through Globalization

Nevertheless, Drezner asserts that though some multinational corporations’ maybe taking advantage of globalization to enhance their profits by outsourcing, the expansion of the internet has made US workers lose their long held advantage of gaining well paying jobs in the face of globalised competition that lead corporations seek the best skilled employees globally.

Drezner thus maintains that protectionism will be catastrophic with insignificant expansion, inferior returns and less work for American employees’ ensuing, concluding that “offshore outsourcing is not the bogeyman that critics say it is” (n.p).

Kirkegaard (9) has supported the argument that US job losses due to outsourcing are largely exaggerated. Citing labor statistics, he asserts that job turnover rates have been consistent every quarter with forecasted losses of 3.3 million job losses in 15 years as not very alarming as job creation is also in tandem with the trend or sometimes higher (figure: 2). Kirkegaard (17) cites the over 70, 000 programmers while 115,000 better salaried software engineering jobs were created since 1999.

Figure 2

US job turnover q3

Similarly Kirkegaard (17) argues that job losses may be prevalent in some states while gains are recorded elsewhere as job patterns change as evidenced in the production job losses in Michigan paralleled by gains in Colorado. Nevertheless many jobs have been lost in the manufacturing sector apart from the noted white collar job losses while even esteemed managerial positions have been affected (see Figure:3). The author however notes that the lower end jobs lost could have been eventually wiped out by technological advances.

Figure 3

Bhagwati et al (11) have argued that numbers of outsourced US jobs are too negligible to elicit the kind of debate prevalent. Similarly, the authors claim that allegations of high value job losses are improbable given that the better skills acquired outweigh the losses. Most Americans (69 percent) however blame the trend of offshore outsourcing as the main factor to reduced employment with an Associated Press-Ipsos poll in May 2004.

The authors however insist that “outsourcing is a relatively small phenomenon in the U.S. labor market” which is far offset by the relative gains in equivalent business in is thus a phenomenon of international trade that will eventually be evened out as the long term benefits seep in Bhagwati et al (35).

Mankiw & Swagel (1056) examining the impact of the political impact upon the release of the Economic Report of the President (ERP) in 2004 support the assertion that the economic impact of outsourcing on US economy and labor markets is insignificant. The authors maintain that the recession experienced and job losses between 2001 and 2004 cannot be solely attributed to the offshore outsourcing phenomenon.

On the contrary, the authors maintain that outsourcing by the corporations imply that enhanced offshore jobs abroad by the U.S. transnational partner firms can be linked to additional jobs for the domestic labor markets. But for most multinationals, as one the authors (Mankiw) asserted before a Congressional House Committee in Feb. 2004, “when a good or service is produced more cheaply abroad, it makes more sense to import it than make or provide it domestically” (Wolverson and Gardner).

Nelson (2) underlines the attacks on outsourcing are some of the fallacies advanced by critics of globalization who find the idea of offshore jobs as the most visible adverse effect of globalization. Although critics offer minimal empirical studies to back their arguments, Nelson asserts the political implication of job losses in the domestic front render the detractors’ credence together with the anti-immigrants decry the offshore relocations by the conglomerates.

More recently, Trade & Global Market an economic think-tank organization maintained that there are more gains from outsourcing than losses to the US economy. Citing Federal statistics, they state that outsourcing actually generate $50 billion to the economy net earnings from the offshore firms as a quarter of the labor market is concentrated in the two most controversial segments (see Figure: 4).

Figure 4

Outsourcing Balance

Thus outsourcing has direct implications on domestic economy and international trade as returns from enhanced trade relations translates to extra markets for US goods and products according to the Thomas Donohue, US Director General of Commerce (“U.S. and Global Trade”).

Outsourcing has nonetheless been linked to various adverse effects on the populace as the US unemployment rates continue to soar. Jobless citizens are a strain on the public with many more people forced to seek Social Security and Medicare benefits while the consumption rates continue to deep even further.

State and Federal governments also lose out on possible revenue from taxation (Mandel). Outsourcing also leads to loss of skills as less Americans are needed to undertake some jobs like in IT and engineering while much of the infrastructure that goes in hand with the production process is neglected or altogether not developed.

Although service jobs are mostly for unspecialized skills, the loss in the labor sector is detrimental to the economy as the workers therein absorb outputs from the manufacturing segment. Likewise, the service sector provides most of the labor market with almost 80 percent hence losses to the sector mean a heavier impact on the economy (Chapman n.p.).

Drezner thus admits that outsourcing though largely beneficial to the industry players, is in fact harmful to the labor market and populace as high unemployment leads to less people able to purchase housing and other amenities. Similarly there have been suggestions that most companies in their haste to seek offshore domestications often neglect to seek more viable US domestic locations in diverse states that can similarly offer subsidized labor market and can safe on relocation costs among other expenses.

Conclusion

Although the incidence of high taxation levels in the US economy have been cited as reasons for firms seeking offshore locations and outsourcing, some economic analysts have refuted this claims as evidence indicate that US multinational corporations actually pay less duties unlike the erstwhile quoted OECD countries.

Some of the real reasons maybe the desire to reduce production expenses occasioned by high labor wages and the tightening of accounting reports in the aftermath of the Sarbanes-Oxley after corporate scandals (Beale). Thus sustaining American businesses against globalization effects is more paramount in the long term than upholding US labor markets which can have damaging impact on the US economy as protectionism is impractical in the contemporary digital internet age.

Works Cited

Beale, Linda. “Corporate Taxes from the AEI perspective–the AEI report gets an F.” Angry Bear, 20 Feb. 2011, angrybearblog.com/2011/02/corporate-taxes-from-aei-perspective.html..

Bhagwati, Jagdish et al. “The Muddles over Outsourcing.” The Journal of Economic Perspectives, no. Fall, 2004, 1-42.

Chapman, Bob. “Outsourcing and Offshoring in the Global Economy: US Corporations Moving to Offshore Tax Havens.” International Forecaster, 21 Sept. 2011, www.globalresearch.ca/outsourcing-and-offshoring-in-the-global-economy-us-corporations-moving-to-offshore-tax-havens/26708..

Drezner, Daniel W. The Outsourcing Bogeyman. Foreign Affairs, no. May/June, 2004, www.foreignaffairs.com/articles/united-states/2004-05-01/outsourcing-bogeyman..

Dwivedi, Jay. Impact of Offshoring on American Economy. 2008, Iiproceed.com. .

Kirkegaard, Jacob F. Outsourcing—Stains on the White Collar? Institute for International Economics, 2004.

Mandel, Michael. “The Real Cost Of Offshoring.” Bloomberg. 2007..

Mankiw, Gregory N. and Phillip Swagel. “The politics and economics of offshore outsourcing.” Journal of Monetary Economics, vol. 53, no. 5, 2006, pp. 1027-1056.

Mann, Catherine L. Offshore Outsourcing and the Globalization of US Services: Why Now, How Important, and What Policy Implications. Policy Brief PBO 3-11, Institute for International Economics, 2005.

Nelson, Doug. “Outsourcing and the Political Economy of Globalization: A Discussion Note.” The Political Economy of Globalization: How Firms, Workers, and Policymakers Are Responding to Global Economic Integration. Center for Globalization and Governance, 2005. pp. 2-7.

U.S. and Global Trade Benefit From Outsourcing. PR-GB.com. 2010, app.officebeacon.com/ecomm/US-And-Global-Trade-Benefit-From-Outsourcing%5B1%5D.pdf..

Wolverson, Roya and Eric Gardner. “Outsourcing Jobs and Taxes.” The Council on Foreign Relations. 11 Feb. 2011, www.cfr.org/backgrounder/outsourcing-jobs-and-taxes..

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