Posted by
In an era of misinformation overload, it is disheartening to see the Washington Post perpetuating the ignorance
surrounding the issue of outsourcing. To be sure, in addressing the
topic in Tuesday’s paper, writers Tom Hamburger, Carol D. Leonnig, and
Zachary A. Goldfarb were merely presenting the case of Obama’s critics
“primarily on the political left,” who claim the president has failed to
make good on his promises to curtail the “shipping of jobs overseas.”
That conclusion may be accurate. But the article’s regurgitation of
myths about outsourcing and trade, peddled by those who benefit from
restricting it, gives readers a parochial perspective that leaves them
confused and uninformed about the manifestations, causes, consequences,
benefits, and costs of outsourcing.
Outsourcing is a politically-charged term for U.S. direct investment
abroad. Although the large majority of that investment goes to rich
countries, the Post article claims that “American jobs have
been shifting to low-wage countries for years, and the trend has
continued during Obama’s presidency.” While that may be factually true,
the numbers are likely fairly small. Many more jobs have been lost to
the adoption of more productive manufacturing techniques and new
technologies that require less labor. And we, overall, are much
wealthier for it.
The article attributes 450,000 U.S. job losses to imports from China
between 2008 and 2010 – a figure plucked from an “economic model” at the
Economic Policy Institute that has been criticized by everyone in
Washington but Chuck Schumer and Sherrod Brown. That estimate is the
product of simplistic, inaccurate assumptions equating the value of
exports and imports to set numbers of jobs created and destroyed,
respectively, as if there were a linear relationship between the
variables and as if imports didn’t create any U.S. jobs in, say, port
operations, logistics, warehousing, retailing, designing, engineering,
manufacturing, lawyering, accounting, etc. But imports do support jobs up and down the supply chain.
Yet, so blindly committed are EPI’s stalwarts to the proposition that
imports kill U.S. jobs that they even suggest that the number of job
losses would have been greater than 450,000 had the U.S. economic
slowdown not reduced demand for imports. In that tortured logic, the
economic slowdown saved or created U.S. jobs. But I digress.
Contrary to the misconceptions so often reinforced in the media,
outsourcing is not the product of U.S. businesses chasing low wages or
weak environmental and labor standards abroad. Businesses are concerned
about the entire cost of production, from product conception to
consumption. Foreign wages and standards are but a few of the numerous
considerations that factor into the ultimate investment and production
decision. Those critical considerations include: the quality and skills
of the work force; access to ports, rail, and other infrastructure;
proximity of production location to the next phase in the supply chain
or to the final market; time-to-market; the size of nearby markets; the
overall economic environment in the host country or region; the
political climate; the risk of asset expropriation; the regulatory
environment; taxes; and the dependability of the rule of law, to name
some.
The imperative of business is not to
maximize national employment, but to maximize profits. Business is thus
concerned with minimizing total costs, not wages, and that is why those
several factors are all among the crucial determinants of investment
and production decisions. Locales with low wages and lax standards tend
to be expensive places to produce all but the most rudimentary goods
because, typically, those environments are associated with low labor
productivity and other economic, political, and structural impediments
to operating smooth, cost-effective supply chains. Most of those crucial
considerations favor investment in rich countries over poor.
Indeed, if low wages and lax standards were the real draw, then U.S.
investment outflows wouldn’t be so heavily concentrated in rich
countries. According to statistics published by the Bureau of Economic Analysis,
75 percent of the $4.1 trillion stock of U.S. direct investment abroad
at the end of 2011 was in Europe, Canada, Japan, Singapore, Australia,
New Zealand, Taiwan, Korea, and Hong Kong (i.e., rich countries). In
contrast, only 1.3 percent of total U.S. foreign direct investment stock
is in China.
Likewise, if wages and lax standards were magnets for investment, we
wouldn’t see the vast sums of foreign direct investment in the United
States that we do, and the United States wouldn’t be the world’s most prolific manufacturing nation.
At the end of 2010, foreign direct investment in the United States
totaled over $2.3 trillion, one third of which was invested in U.S.
manufacturing facilities. As the president and his critics (including
candidate Romney) drone on about the ravages of “shipping jobs
overseas,” they should take a moment to note that 5.3 million Americans work for U.S. subsidiaries of foreign companies
(jobs “outsourced” from other countries). And they should note that
Europe’s Airbus announced last week that it is making a $600 million
investment in a 1000-worker aircraft assembly plant in Mobile, Alabama,
just down the road from the $5 billion, 1800-worker steel production
facility belonging to Germany’s Thyssen-Krupp, which is located within a
few hours’ drive of a dozen mostly foreign nameplate auto producers,
who employ tens of thousands more U.S. workers and generate economic
activity supporting thousands more. These investments, jobs, and related
activity are the products of foreign companies outsourcing.
Why do these foreign companies come to American shores to produce
instead of producing at home and exporting? Because each company has
determined that it makes sense from an aggregate comparative cost
perspective. They’re not here because of low wages or lax enforcement of
labor and environmental standards, but because all of the factors
affecting cost that each company uniquely considers, weigh – in the
aggregate – in favor of investing here. One very important factor for a
growing number of companies is proximity to market. Shipping products
long distances can be costly, particularly for time-sensitive products
and parts. And having a productive presence in your largest or fastest
growing market is a factor that carries significant weight. Exporting
is not always the best way to serve foreign demand.
But outsourcing has been stigmatized as a process whereby U.S.
factories are disassembled rafter-by-rafter, machine-by-machine,
bolt-by-bolt and then reassembled in some foreign location for the
purpose of producing goods for sale back in the United States. There may
be a few instances where that accurately depicts what took place, but
it is simply inaccurate to generalize from those cases. According to the
BEA research described in these two papers (Griswold and Slaughter),
between 90 and 93 percent of U.S. outsourcing – investment abroad – is
for the purpose of serving foreign demand. Only between 7 and 10 percent
of that investment is for the purpose of making sales back to the
United States.
In 2009, U.S. multinationals sold over $6 trillion worth of goods and
services in the foreign countries in which they operate, which was
nearly quadruple the value of all U.S. exports that year. Outsourcing
helps make U.S. multinational corporations more competitive, and the
profits they earn abroad (even if they’re not repatriated) underwrite
investment and hiring by the parent companies in the United States.
Typically, the U.S. companies that are investing abroad are the same
companies that are investing in the United States for reasons that
include the fact that U.S. MNC investment abroad tends to spur
complementary investment and hiring in the U.S. parent operations.
The capacity to outsource also serves another crucial, underappreciated function: to safeguard against bad U.S. policy.
Like tax competition, outsourcing provides alternatives for businesses,
which help discipline sub-optimal or punitive government policy.
Because of globalization and outsourcing, businesses can choose to
produce and operate in other countries, where the economic and political
environments may be more favorable. As more and more companies
undertake these comparative aggregate cost-of-doing-business
assessments, governments will have to think long and hard about their
policies.
Governments are now competing with each other to attract the
financial, physical, and human capital necessary to nourish high
value-added, innovation-driven, 21st century economies. Restricting or
taxing outsourcing as a means of trapping that investment wouldn’t be
prudent. It would render U.S.businesses less competitive, and
ultimately reduce employment, compensation, and economic activity. In
this globalized economy, policymakers cannot compel investment,
production, and hiring through threat or mandate without killing the
golden goose. But they can incentive U.S.companies to return some
operations stateside and foreign firms to invest more here by adopting
and maintaining favorable policies.
According to the results of a survey of over 13,000 business executives worldwide published in the World Economic Forum’s Global Competitiveness Report 2011/12, there
are 57 countries with less burdensome regulations than the United
States. That same survey found that business executives are increasingly
concerned about crony capitalism in the United States, ranking the U.S.
50th out of 142 economies in terms of the government’s ability to keep
an arms-length relationship with the private sector. Then consider the
fact that the United States has the highest corporate tax rate among all
OECD countries. Add to that the prevalence of frivolous lawsuits,
political uncertainty, out-of-control government spending, the dearth of
skilled workers, uncertainty about the tax burden come 2013, and it
starts to become clear why U.S. companies might consider investing and
producing abroad. But policymakers can improve policy — in theory, at
least.
It boils down to this. About 95 percent of the world’s consumers and
workers live outside the United States. We live in a world where U.S.
companies have much more competition on the supply side, much greater
opportunity on the demand side, and far greater potential for tapping
into a global division of labor (i.e., collaborating across borders in
production) than 50, 20, even 5 years ago. After a very long slumber,
the rest of the world has come on-line. We should embrace, not curse,
that development.
In a globalized economy, outsourcing is a natural consequence of
competition. And policy competition is the natural consequence of
outsourcing. Let’s encourage this process.
No comments:
Post a Comment