This paper was prepared for ENS 215 Research & Writing
taught by Professor
The growing conversation over global outsourcing of jobs has been a source of fury and heated debate in the national conversation, particularly in the past 15 years with rise of globalization. In 2004, then chair of the Council of Economic Advisors, Gregory Mankiw made a public statement endorsing outsourcing as a likely plus for the economy, and characterizing in neutral terms (as quoted in Kierkegaard (2004): "Does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiber-optic cables? Well, no, the economics is basically the same." Mankiw's endorsement caused a stir in the press, with commentators and the public accusing him of endorsing a decline in job. The resulting public debate over outsourcing has been conflicted by confusions over the effects of outsourcing and whether the government should intervene. This paper argues that the debate has been misunderstood and that the government should not take action in order to prevent outsourcing.
This debate has been misaligned in part because of confusion over what outsourcing entails. In the official documents of the World Trade Organization (WTO), contained within its General Agreement on Trade in Services (GATS), there are four different ways in which services can be traded. In Mode 1 of the WTO terminology, trade in services is described as arm's-length supply of services. (Milberg & Winkler 2013) This trade requires that both supplier and buyer remain in their locations. Mode 1 trades have increased as a result of the information economy and technological progress, but this transaction has always been possible for at least some services such as accounting which could be disseminated through snail mail. Mode 1 service providers are available for individuals as well as firms and may include independent writes, designers, and other consultants who wish to sell their services via electronic means to manufacturers and other consumers globally. (Milberg & Winkler 2013) In the domain of the provide there are software programmers as well as call centers as available examples. Mode 1 is distinct from Mode 2 with the fact that Mode 2 service provision happens as a result of moving the receiver of the services to the location where the provider resides. Tourism and travel dominates this mode of exchange. Mode 3 requires that a service provider set up an actual presence in another country, which requires some degree of foreign direct investment. Banking and insurance service providers may fall under this category, as the foreign direct investment in this modality is assumed to be quite small and only necessary for the provision of services. (Milberg & Winkler 2013) Mode 4 is full on foreign direct investment, requiring the service provider to move directly to the physical location of the service buyer. Construction services, as well as doctors and educational institutions may count in this mode. Trade in Mode 1 services is what most economists mean when they discuss "outsourcing” and it is the subject of this discussion.
The discussion about outsourcing has grown murky and somewhat misleading in part because of confusion over the Modes of selling long-distance services in the manner of Mode 1. Public outrage often bags all Modes into one package, as if the issues were unilateral across the board, which is not the case. Sometimes outsourcing critics even will include firm importations of manufacturing parts (as was a use for the term outsourcing in earlier decades of the 1980s).( Rajan 2007) Enlarging the scope of outsourcing in this manner thus should require all factor inputs that may be imported to be included. The second problem is the issue of FDI or foreign direct investment and its misguided application to the outsourcing discussion of Mode 1. When a firm closes its Baltimore plant and switches investment to a production facility in Delhi, or when a firm opens up a production factory in San Juan versus Durham. Foreign direct investment is a phenomenon distinct from trade in services. That said, sometimes both Mode 1 trade in services and foreign direct investment are tied together, as is the case when Hewlett Packard invests in a call center facility in Bombay to operate its telephone support lines. That said, the relative pros and cons with respect to market dynamics are in fact separate issues relative to long distance trade in services in the case of Mode 1 versus foreign direct investment costs and benefits. For our discussion, we limit our scope to Mode 1.
Despite a heated debate in the wider public conversation, research suggests that the degree to which jobs have been affected by outsourcing by Mode 1 services in the United States economy is quite small. The modest size of the number becomes apparent on both sides of the window, whether we consider the buyer's or the seller's side of the transaction. From the side of the buyer, one frequently cited estimate in the literature is in a 2004 report from Forrester Research, Incorporated (Kierkegaard 2004) In this report, McCarthy finds that by 2020, total number of U.S. jobs outsourced will be 3.4 million. That said, the Forrester report does not indicate if the U.S. economy will actually have an aggregate of 3.4 million less jobs in 2020 than it might otherwise have because of the problem of outsourcing. A plausible assumption and one that is confirmed by the research is that outsourcing causes 3.3 million U.S. workers to shift into jobs that are different from the ones they had previously held.
This paper argues that outsourcing is at root just a matter of trade. Outsourcing can result in gains from trade, and its effects on jobs and wages are not much different from those of normal trade in goods. Other sources confirm the futility of this worry and likewise suggest that the overall effect of outsourcing has thus far been negligible. The U.S. Department of Labor collects data from domestic companies which layoff 50 persons or more. In the past 5 years from 2007, only 2 percent were reported to have actually come form companies moving their business operations abroad or into zones that are competitive areas for imports. (Tomiura 2007) Taken in this light, it seems that outsourcing operations in the manner of Mode 1 services must be only a small fraction of total layoffs. We can also measure the number of outsourced jobs from the side of the seller. One of the largest providers of Mode 1 services is India. With consideration of India's national trade organization NASSCOM which collects data of workers like software developers and call center operators, the jobs increase reported between March 2006 and March 2010 faced an aggregate increase of approximately 500,000. This increase reported that 70 percent of workers were selling services for clients in the United States. This results in about 61, 650 jobs per year, according to Milberg and Winkler (2013).
We can now consider some wider macroeconomic effects of outsourcing that may result. Having already established that the outsourcing is a given phenomena in our contemporary globalized economy, we have also discussed the marginal level of harm it will have on the wider American workforce. With this in mind, there is a second effect that may actually be beneficial in terms of United States trade gains. For when outsourcing goes abroad, this gives the opportunity and incentive for skills acquisitions in foreign economies. When American companies spur growth and skills expansion abroad, this results in a decrease in costs for American firms because the imported skills are now cheaper. When we consider the potential impact of foreign growth and take outsourcing as given, the result is that information technology services will now be cheaper from within the United States. This is a benefit, but it also bears some costs. For by doing so, the supply of information technology goods on the international market are thereby expanded, and this will bear some competition with the products that the United States economy exports as well. In the end, this could impose some marginal risk on the US terms for trade.
Available projects and evidence regarding the negative affects of outsourcing on the United States economy are slim. Economic research suggests that while outsourcing may result in very small amounts of job displacement relative to the wider economy, the use of outsourcing by firms is not a cause for economic concern which would require protectionist measures.
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