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Gifts for all occasions in the Galleria! Subscribe to the "What is the Deal?" mailing list. April 4, 2004 What is the Deal with Outsourcing? By Jan A. Larson John Kerry has made a campaign issue of "outsourcing" or the practice of multinational corporations to move some portions of their business to lower-wage countries. Kerry wants to "do something" about outsourcing, but unfortunately, there is nothing he can do that will contribute to the long-term health of the United States economy. There are many factors at play with respect to outsourcing. The factor that everyone understands is the closing of a plant or customer support office that puts Americans out of work. The factors that many don't understand or haven't considered are how outsourcing of some jobs benefits the U. S. economy. This is so little understood, that it is virtually taboo for any politician or government official to even hint at the possibility. Those that dare suggest as such are met with scorn and condemnation. When a multinational corporation moves a manufacturing operation overseas, it is really for one reason - to reduce costs. When companies reduce costs, especially multinationals that do a significant percentage of business overseas, they enhance their competitiveness in the world market and that ultimately leads to lower prices for consumers. Lower prices leave consumers with more money to spend on other things, which, in turn, increases overall economic activity. Enhanced competitiveness for American corporations ultimately leads to job creation, both at home and abroad. In addition, moving low-skill labor offshore frees up higher paid domestic labor to perform higher skilled jobs, provided of course, those higher paid workers have the requisite skills. If we use an example from the "gizmo" industry, we can see how this works. Let's say that American Gizmo's manufacturing plants are all in the United States and their labor costs average $25/hour. The French corporation, LeGizmeaux, also produces gizmos and competes with American Gizmo on the world market. LeGizmeaux's manufacturing is done in Asia with an average wage of $5/hour. How can American Gizmo compete with a company with such a significant cost advantage? One way would be if the American workers they employ could produce five times more gizmos per hour than LeGizmeaux's Asian workers. Productivity has always been a strength of the American workforce, but given the two plus decade decline in the American public education system, the sad fact is that, the United States just doesn't produce a workforce with skills significantly better than those in other countries, particularly India and China. Students in India commit suicide if they are not accepted into the best universities. The American public education system produces students that may have high self-esteem, but often lacking in the skills and abilities required to compete at the highest levels in the global economy. Emerging economies such as India and China are not standing still when it comes to education, manufacturing and technology. The competition from these countries and others will only increase in years to come. Returning to the example about gizmos. If American Gizmo was effectively prevented from utilizing offshore labor via policies in the name of "protecting" American jobs and their productivity was something less than five times better than LeGizmeaux's labor, they would be left at a competitive disadvantage to LeGizmeaux, especially if you couldn't tell the difference between one gizmo or another. It would simply be a matter of time before American Gizmo joined the scrap heap of great American companies that couldn't compete while LeGizmeaux grows to dominate the world gizmo market. All of the jobs that were ostensibly "protected" would be gone. The effects of such a scenario were recently seen in the steel industry. When the U. S. government tacked tariffs onto imported steel to "protect" the American steel industry, the result was that the market for U. S. steel dried up. It is generally accepted that more jobs were lost than were protected and wisely, the tariffs were rescinded. Both President Bush and Senator Kerry claim that American workers can compete with any in the world in an environment of "fair trade." The problem is that nothing says that trade or the global economy is fair. We've got to compete in the global economy as it is, fair or not. A protectionist policy or manipulation of the tax code to punish multinational companies will only delay the inevitable. The fact is that we are in a competitive global economy and there will be winners and losers. The price of losing will be high. Yes, it is not pleasant to be within five or ten years of retirement only to be told your job is being phased out, but that is the way the game is played. Unfortunately, we don't make the rules of this game. The key for the American worker, all American workers, is to stay ahead of the competition in terms of skills and education. American workers, if they truly are the best in the world, should not be afraid of outsourcing. Outsourcing makes American business stronger in the global economy and stronger companies means more growth and more opportunities for American workers. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. To submit an article to "What is the Deal?" click here. To subscribe to the "What is the Deal?" mailing list and receive early notification when a new column is available, click here. 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