After the Civil War, New England’s textile factories began to relocate to the South, where non-union workers were willing to accept much lower wages. One hundred years later, U.S. textile manufacturers relocated once again, this time to countries like Mexico and Indonesia.
Poor foreign countries have large numbers of job-hungry workers who will work for wages far below the U.S. minimum wage. The globalization of textile manufacturing continues today with China out-competing even these poor, low-wage countries. In this period, hundreds of thousands of textile manufacturing jobs have disappeared in the United States.
The relocation of textile manufacturing from the United States to foreign countries with cheaper labor is an example of outsourcing. American companies import goods for sale in the United States that they once produced here. Sometimes American firms own the foreign factories outright. Or, foreign companies may own them and contract work for American importers.
American companies began to take greater advantage of international outsourcing in the 1970s. Many kinds of factory work began to shift overseas—clothing, steel, toys, television sets, and computer hardware and chips.
Outsourcing accelerated in the 1990s when the United States negotiated free-trade agreements like NAFTA (North American Free Trade Agreement). Such agreements reduced or eliminated tariffs (taxes on goods imported into a country). Without tariffs, cheap foreign-made imports can often undercut the prices charged by American manufacturers with their higher paid workers.
Today, only 22 percent of all private enterprise output in the United States is in the manufacturing sector. The United States has changed into primarily a service economy.
Its economic output is the strongest in the world. Its gross domestic product (GDP) is almost equal to that of the next three highest nations’ GDP combined.
Outsourcing of Knowledge-Based Services
In the 1990s, the Internet began to revolutionize the workplace. One consequence is what some have called the “death of distance.” With high-speed telecommunications, workers can complete many jobs on a computer anywhere, even overseas.
Outsourcing of computer or knowledge-based services got a big boost during the explosive expansion of World Wide Web “dot-com” companies in the late 1990s. Imports of outsourced private sector services grew almost 80 percent.
The first type of knowledge-based services to be outsourced was the management of computer networks (information technology, or IT). Next, businesses began to outsource their “call centers,” places customers call to get help with a company’s products or services.
American businesses discovered that low-wage foreign workers could do much “back office” work overseas. Such jobs as data entry, billing, accounting, and processing insurance claims, loan applications, and tax returns shifted out of the country to places like India.
Today, outsourcing of knowledge-based services is expanding to high tech and professional jobs. For example, overseas workers connected over the Internet with companies in the United States are now doing software programming, paralegal work, financial investment research, X-ray and CAT-scan analysis, and drug testing.
The main reason U.S. businesses give for outsourcing is to remain competitive by cutting costs, especially wages. For example, American software programmers in 2004 averaged about $70,000 per year while those in India earned about $8,000.
Nearby Canada is number one in handling American outsourced knowledge-based work. But India has attracted services such as data processing and computer programming. In addition to its low labor costs, India has an advantage over other countries in its time zone difference with the United States. Workers in India can complete jobs while Americans sleep, enabling U.S. businesses to operate 24 hours a day. India’s biggest outsourcing advantage, however, is that each year it produces up to 3 million college graduates, most of whom speak English.
There is much uncertainty about the impact of outsourcing on American knowledge-based jobs because of the lack of data collected in this area. The only U.S. government study so far reported that there were 13,000 layoffs in 2003 due to foreign outsourcing, but most of those were in manufacturing. Global Insight, a private firm, estimated that about 104,000 IT jobs were lost to outsourcing from 2000 to 2003. These numbers make up a small fraction of the 140 million workers in the U.S. economy.
Some researchers estimate that from 3.3 to 14 million knowledge-based jobs will be at risk between 2000 and 2015 because of outsourcing. In 2004, the U.S. Government Accountability Office cautiously concluded that outsourcing “is a small but growing trend in the U.S. economy.”
The Debate Over Outsourcing
One of the most prominent opponents of foreign outsourcing is Lou Dobbs, anchor of a business news program on CNN. He has written a book titled Exporting America: Why Corporate Greed Is Shipping American Jobs Overseas. He argues that multinational corporations are outsourcing American jobs for their own benefit and to the detriment of American workers. He says that we are weakening the American middle class by “firing” our consumers and taxpayers from these good-paying occupations.
Dobbs argues that outsourcing unfairly forces American workers to compete with low-wage workers in poor countries. For example, the average hourly manufacturing wage in the United States is around $16; in China it is less than $1. Inevitably, he argues, outsourcing will force wages to go down in the United States.
Dobbs believes outsourcing will destroy our economy. He says: “India can provide our software; China can provide our toys; Sri Lanka can make our clothes; Japan can make our cars. But at some point we have to ask, what will we export? At what will Americans work? And for what kind of wages?”
Dobbs thinks that free-trade agreements, like NAFTA, have failed us. He points out that we import billions of dollars more in foreign-made goods than we export. While we still export more services than we import, he thinks outsourcing will change this.
Dobbs argues that the United States should engage in fair trade, not free trade. He cites as an example the agreement that the Reagan administration hammered out with Japan in the 1980s. It put a quota on imports of Japanese cars, but let Japan get around the quota by building manufacturing plants in the United States. Dobbs says: “Reagan’s policy forced overseas corporations to make investments in the United States, from building factories to hiring American workers, if they wanted greater access to our market.”
It troubles Dobbs that even government has resorted to outsourcing. Forty state governments outsource jobs to foreign countries. He cites the example of the Indiana Department of Workforce Development. It is in charge of helping unemployed people in Indiana find work. It awarded a $15 million contract to a firm in India to update its computers. Fortunately, says Dobbs, the governor canceled the contract when people protested. The contract subsequently went to a U.S. company for $23 million.
The American people seem to agree with Dobbs about outsourcing. An Associated Press-Ipsos poll in May 2004 showed that 69 percent of Americans believed that outsourcing hurts the economy. Only 17 percent believed that it helps the economy.
Most economists, however, disagree with Dobbs on outsourcing. President George W. Bush’s top economic adviser, Greg Mankiw, said that “outsourcing is probably a plus for the economy in the long run.” Paul Krugman, a Princeton University economics professor and a harsh critic of the Bush administration’s economic policies, echoed this opinion. He said that “outsourcing is less a threat than is widely perceived.” He thinks that it has become an issue because of the weak economy. He advises going “very slowly on the issue and push hard on a domestic economic recovery program and then take a look around to see where we are after that.”
Most economists view outsourcing as a form of trade. And they consider trade highly beneficial. Timothy Taylor, managing editor of the Journal of Economic Perspectives, said: “The circumstantial evidence that international trade provides economic benefits is overwhelming. Eras of expanding global trade, like recent decades, have generally been times of economic growth. Periods of contracting trade have often involved recession or worse. When a country’s economy expands, its level of international trade typically increases.”
Economists make several points about outsourcing. First, it makes up a small part of the economy. Service imports make up about .4 percent of GDP. Only a third of these services comes from poor countries. The rest comes from other industrial nations.
Second, outsourcing is a two-way street. The United States outsources services, and other countries outsource services to the United States. In fact, the world outsources to the United States about $20 billion more each year in service jobs than the United States outsources. These include high-paying jobs such as professional and business services, education and health services, and information and financial services. The United States outsources mainly low-paying jobs.
Third, outsourcing lowers prices. This helps the American consumer. It also makes U.S. businesses more competitive in the globalized economy, enabling them to stay in business and hold on to higher-paying jobs in the United States. Furthermore, lower prices free up money for investing in innovative products and services. For example, outsourcing the manufacture of computer hardware led to an explosion of computer use, which drove the innovative development of software and the World Wide Web. The result was the creation of many new high-paying jobs.
Fourth, outsourcing accounts for few job losses. The overwhelming majority of jobs lost are not due to outsourcing. But many economists note that the modern American economy has much “job churning,” people moving from job to job. This can be extremely stressful to workers. Many economists call on government to help. Timothy Taylor advises: “The United States could stand to rethink its policies regarding workers who are forced or pressured to move between jobs. Unemployment insurance is one useful mechanism for softening the transition. But there is a range of additional assistance that might be offered to those between jobs, including health insurance, ‘wage insurance,’ and retraining.”
Although most economists believe outsourcing will help the U.S. economy in the long run, some economists disagree. The Economic Policy Institute, a Washington think tank on economic issues, sees some dangers in outsourcing. Its “Issue Guide on Offshoring” acknowledges that the United States currently has a trade surplus in services. But it notes that the surplus is shrinking. In 1997, the surplus was 1.3 percent of GDP. In 2003, it had dropped to .6 percent. If the trend continues, it says, the United States will be losing more service jobs than it gains.
It also points out that India is graduating far more engineers each year than the United States. (In 2003, 250,000 Indians earned degrees in engineering versus 70,000 Americans.) With a highly trained workforce, India may challenge the U.S.’s lead in technical innovation and attract more and more skilled jobs away from the United States.
Writing in a research report for the Fisher Center for Real Estate & Urban Economics (University of California), economists Ashok Deo Bardhan and Cynthia Kroll lay out some possible outcomes from outsourcing. Among the scenarios are these three:
1. Worst-case scenario. The United States fails to continue leading in technical innovation. More high-wage jobs go overseas. Growth in high-wage jobs at home slows. Unemployment grows. Lower wages result.
2. Protectionist scenario. The United States passes laws that prevent certain types of jobs from being outsourced overseas. If the laws are successful, jobs would be protected. The economy overall is less efficient.
3. Best-case scenario. The United States keeps its lead in technical innovation. The innovations lead to new high-paying jobs. The United States continues to outsource low-paying service jobs.
What Should We Do About Outsourcing?
Dobbs believes the United States should negotiate “fair trade” agreements. Some critics of free-trade agreements want to renegotiate them to create a “more level playing field” with international standards for working conditions. Other opponents of outsourcing call for protecting American jobs by tariffs on imports. Protectionists also want to eliminate tax breaks for companies that outsource work. Many call for laws to protect the privacy and security of personal information sent abroad as well as an outright ban on the outsourcing of government work.
Critics of the protectionist approach point out that imposing import tariffs will only cause other countries to do the same, which will harm our export industries. Moreover, putting restrictions on outsourcing knowledge-based services will weaken the competitiveness of U.S. companies and be almost impossible to enforce.
Others propose that the federal government should provide tax credits to encourage research and innovation by U.S. businesses, making them more competitive in the global economy. Some call for the federal government to increase its budget on science and technology research, which has been cut in recent years.
American workers who lose their jobs because of outsourcing may need retraining and extended unemployment benefits. Furthermore, American taxpayers will undoubtedly have to make major investments in public education at all levels. In the new globalized job market, American workers will have to prepare to compete not only with each other but also with those in India, China, and everywhere else in the world.
For Discussion and Writing
1. What are similarities and differences between the outsourcing of manufacturing and knowledge-based work?
2. What do you think is the main reason for U.S. businesses outsourcing work?
3. Do you think outsourcing is a bad thing or a good thing? Why?
What Should the United States Do About Outsourcing?
Below are four proposals for dealing with outsourcing. In small groups, do the following:
a. Discuss the pros and cons of each proposal.
b. Decide which proposal you most favor.
c. Prepare to report your decision and the reasons for it to the class.
1. Do nothing.
2. Ban outsourcing.
3. Offer unemployed workers retraining and extended unemployment benefits.
4. Offer businesses tax credits for research and raise federal spending on science research.
5. Increase spending on elementary and secondary education, especially in math and science.
Encyclopedia Articles on fair and free trade:
Globalissues.org: Free Trade This site covers a wide variety of topics related to free and fair trade.
Encyclopedia Articles on the North American Free Trade Agreement:
Encyclopedia Articles on Outsourcing:
Encyclopedia Articles on Globalization:
The Globalization Institute This site discusses all issues related to outsourcing and globalization.
The Global Call Center Report: International Perspectives on Management and Employment (PDF file) A 2007 report on call centers.
YaleGlobal Online: Globalization A large collection of articles related to globalization.
Business Week: Outsourcing A 2006 edition devoted to the issue of outsourcing.
Economist Magazine: Outsourcing A 2007 article.
Organisation for Economic Co-operation and Development: Globalisation, Jobs and Wages (PDF file) A 2007 report.
The New Wave of Outsourcing A 2003 report for the Fisher Center for Real Estate & Urban Economics by Ashok Deo Bardhan and Cynthia Kroll.
Dani Rodrik's weblog: Unconventional thoughts on economic development and globalization A blog from a professor of international political economy at the Kennedy School of Government, Harvard University.
Greg Mankiw's Blog: Outsourcing Redux George W. Bush’s former chairman of the Council of Economic Advisers states his view of outsourcing in this post from his blog.
Technorati: Outsourcing Links to the latest posts on outsourcing from blogs.
PoliticalCartoons.com: Outsourcing Large collection of political cartoons on outsourcing.
CartoonBank: Outsourcing Cartoons from the New Yorker magazine (not editorial cartoons).
Princeton University: Fear of Offshoring This paper argues that the U.S. should not fear outsourcing’s economic impact.
Foreign Affairs: The Outsourcing Bogeyman University of Chicago political scientist Daniel W. Drezner argues that outsourcing benefits the United States.
Finance & Development: Demystifying Outsourcing: The numbers do not support the hype over job losses (PDF file) Article arguing that outsourcing is not hurting the economy. By Mary Amiti, an economist, and Shang-Jin Wei, the head of the Trade Unit in the International Monetary Fund’s Research Department.
Exporting America CNN’s Lou Dobbs’ list of “U.S. companies either sending American jobs overseas, or choosing to employ cheap overseas labor, instead of American workers.”
New York Times: An Elder Challenges Outsourcing's Orthodoxy Article on Nobel-prize winning economist Paul Samuelson and his views on outsourcing.
InformationWeek: Is Outsourcing Killing Jobs? A debate between Lou Dobbs and Sunil Wadhwani.
New York Times Magazine: It's a Flat World, After All An article by Thomas Friedman summarizing his best-selling book The World Is Flat.
MIT World: The World Is Flat A video lecture by Thomas Friedman, based on his best-selling book The World Is Flat.
Wikipedia: The World Is Flat A summary of Friedman’s argument with links to reviews of the book.
Interviews with Thomas Friedman:
NPR: Fresh Air: Thomas Friedman Audio file.
John Gray: The World Is Round (PDF file) A rejoinder to the views of Friedman.
offshore outsourcing An academic article arguing for a particular type of outsourcing.
U.S. Government Accounting Office: Current Government Data Provide Limited Insight Into Offshoring of Services This governmental paper explains that they do not know the extent to which outshoring has had a negative effect on the economy.
CNN Money: Answers on Outsourcing: A finance professor argues against placing blind faith in outsourcing.
This article discusses how you decided on the merits of outsourcing.
The Leftcoaster: “ The“What About Outsourcing?” An interview with liberal pundit and columnnist Paul Krugman.
In Defense of Globalization By Jagdish Bhagwati.
Outsource: Competing in the Global Productivity Race By Edward. Yourdon.
Outsourcing America: What's Behind Our National Crisis And How We Can Reclaim American Jobs By Ron Hira and Anil Hira.
The World Is Flat: A Brief History of the 21st Century By Thomas Friedman.
False Dawn: The Delusions of Global Capitalism By John Gray.