Attacks On Offshoring Are Misplaced, Misguided And Just Wrong

Tuesday, November 2, 2010 - 01:00

Editor: Please describe your practice area.

Guedry:I have been involved in the outsourcing industry for close to 25 years. I'm recognized as a thought leader in the industry and advise leading global service providers and Fortune 1000 companies on complex sourcing relationships, including assisting with developing legal, operational and business strategies. I also regularly consult with the leading consultants in the industry on market trends to help Jones Day's clients remain competitive.

Editor: Please share with us your thoughts on the broader effects of outsourcing.

Guedry: Outsourcing has become a convenient "whipping boy" as the U.S. struggles with its continuing high unemployment rate. Outsourcing's opponents are long on passion, but short on facts. The facts are that outsourcing is good for American business and good for the American worker.

It may be useful at the outset to distinguish between outsourcing generally and outsourcing that involves moving jobs or services to foreign locations, or what has become known as "offshoring." The vast majority of outsourcing by U.S. companies does not involve offshoring of any kind. Rather, it moves jobs or services from one U.S. location to another.

Outsourcing is an indispensable tool for American businesses. When Company A farms out a business function such as manufacturing, information technology or human resources to Company B, who provides that same function more efficiently, Company A can focus on what it does best. Outsourcing has been around for centuries, even before the village innkeeper started buying vegetables from the farmer instead of growing his own.

Outsourcing also provides for the most efficient use of scarce and costly resources. That, in turn, allows U.S. companies to produce and sell goods and services more cheaply. None of us gets wealthier if we're forced to overpay for products that can and should be made and sold for less.

Like outsourcing generally, offshoring helps U.S. companies compete in a global economy. It allows them to take advantage of global labor arbitrage opportunities by moving operations and resources to their most efficient locations.

What is getting lost in this debate is the positive impact that an expanding and wealthier global economy has on the U.S., still the largest exporter in the world. By moving work that can be done more efficiently to other countries, the standard of living generally increases in those countries (see India, Brazil and China). As a result, U.S. companies, by moving work to its most efficient location, are helping to create new markets for its products. Outsourcing is not a zero sum game.

Editor: The political focus has been on the loss of U.S. jobs attributable to offshoring. Is that in fact the case? Guedry: While it's true that is where the political rhetoric and the media hype has been, the real numbers say it just isn't so. In economic study after economic study, the data show that offshoring results in job growth and value creation in the U.S. Matthew Slaughter of Dartmouth concluded that for every person employed by a foreign subsidiary of a U.S. corporation, two jobs are created in the U.S.An independent study by McKinsey & Company determined that $1.46 in new economic value is created for every dollar American companies spend offshore.The cost savings that U.S. companies achieve by sending work offshore accrue to the benefit of the American consumer through lower prices for products and to the American worker through more and higher paying jobs.

What, interestingly, the offshoring naysayers omit, is the number of jobs that are insourced. Companies based outside of the U.S. are increasingly importing work to the U.S. - reverse-offshoring, if you will. A recent study based on data from the Department of Commerce showed that subsidiaries of foreign companies employ almost six million people in the U.S. But if we start adopting policies to prevent work from moving offshore, we should expect retaliation. Foreign governments would likely put similar restrictions on their companies, prohibiting them from setting up operations in the U.S.

While offshoring continues to garner the attention of the press, the data show that the actual number of jobs recently lost in the U.S. from offshoring pales in comparison to the numbers lost as a result of the dismal global economy. The Bureau of Labor Statistics September 2010 report on mass layoffs shows that less than 6 percent of the jobs lost from the prior quarter were lost as a result of outsourcing - moving a job to another location (and it was only 4 percent for the prior two quarters). And just a small fraction of that percentage was attributable to offshoring. In fact, jobs lost from outsourcing are more than three times as likely to move from one state to another than they are to be moved offshore. Outsourcing and offshoring simply are not the cause of the high unemployment rate.

Editor: Would the outsourcing of a call center to an independent company in India have a positive effect on U.S. employment?

Guedry: Well, it's hard to argue that simply moving 50 jobs from Dallas, Texas to Mumbai, India is good for those 50 people in Dallas who just lost their job. It's not. However, if moving those 50 jobs to Mumbai results in the Dallas company being able to better compete, offer its products at a lower cost, and keep its doors open, continuing to employ its other 1,000 employees, then - yes, moving those 50 call center jobs to India has benefited U.S. employment, consumers and investors.

Editor: If outsourcing does create more U.S. jobs, why are unions so strongly opposed to it?

Guedry: Again , offshoring is an easy target. When a Fortune 500 company sends 50 jobs to Brazil, it's simpler and more newsworthy for the union boss to blame the company for his union's high unemployment rate than it is for him to grapple with the myriad factors causing the global economy's downward spiral. But the focus is all wrong. Unions, politicians and American companies should be talking about ways to re-train workers whose jobs are gone, no matter the reason. Simply erecting barriers to keep work from moving to its most efficient location isn't good for anyone, most especially the American worker and consumer.

Editor: Describe the Creating American Jobs and Ending Offshoring Act.

Guedry: The Creating American Jobs and Ending Offshoring Act was sponsored by Senator Richard Durbin and introduced in September 2010. It also died the same month when the Senate was unable to prevent a filibuster. The bill's sponsors said it would create American jobs. The bill's opponents responded that it would only create jobs for lawyers and accountants.

The bill would have amended the Internal Revenue Code in three ways. First, it would have given a two-year tax break to U.S. companies that hired a U.S. worker to displace a foreign worker. During those two years, the companies wouldn't have to pay the employer share of the Social Security payroll tax on the wages of the U.S. worker. Opponents believed that this would unintentionally give tax breaks to companies that were going to employ U.S. workers anyway and that the company would have its lawyers and accountants create a rationale as to why the person hired in Ohio was displacing an employee in the Philippines. So, there would have been no new job creation - and less tax revenue - for the U.S.

The second amendment would have prohibited U.S. companies from deducting the business expenses of moving U.S. operations to an offshore location. And the third would have ended U.S. companies' ability to defer U.S. taxes on income generated outside of the U.S. until repatriated. Again, opponents of the bill believed the unintended consequence of these last two amendments could likely be loss of American jobs and tax revenue. This bill, according to its opponents, did nothing more than erect new tax barriers for U.S. companies trying to remain competitive in a global economy.

Editor: If the proposed legislation can't be passed in Congress, is it likely that something like this could come out of the administration in the form of regulations?

Guedry: I don't think this particular bill is going to come back, but we're going to continue to see variations of it until the unemployment problem is solved. We're still hovering at between 9.5 and 10 percent nationally, and the U.S. government will, and should, look at ways to create incentives - workable incentives - for U.S. companies to add jobs in the U.S. and to remove barriers, including uncertainty over its actions, that keep U.S. companies from adding to their U.S. payrolls.

Editor: Do you think that offshoring is going to be a continuing issue?

Guedry: Until the U.S. unemployment figures start decreasing and decreasing significantly, offshoring will continue to be a target. It makes good headlines and it's so much simpler for U.S. policymakers to point a finger elsewhere and blame the greedy U.S. companies and the foreign governments that are stealing work from American workers.

Editor: Describe the effect of the order issued by the governor of Ohio that bans the use of public funds for services provided offshore.

Guedry: I think we need to see if Ohio Governor Strickland's ban even survives. It's likely to face attack on a number of fronts - on constitutional grounds or as a violation of a number of international trade agreements to which the U.S. is a party. The National Foundation for American Policy did a terrific analysis of this issue about 5 or 6 years ago.

That said, if the ban survives, it could result in harsh retaliatory action from foreign companies and governments. Foreign companies doing business with the state of Ohio (or foreign governments benefiting from Ohio offshored work) are likely buying products made by companies located in Ohio. I don't think it a stretch to expect these foreign companies and foreign governments to do to Ohio and its corporate base exactly what Ohio is doing to them. Thus, Governor Strickland's ban may ultimately cost Ohio jobs and revenue. It's also worth noting that the ban, even if it does withstand the legal attacks that are likely to come, does nothing to prevent jobs and work from leaving Ohio and moving to another state.

Editor: How would you sum this up?

Guedry: If and when employment levels are back in the range of four to six percent, much of this "outrage" over offshoring, false or not, will go away. Until then, we need to keep the debate focused on where it needs to be - growing the U.S. economy. That is what will add jobs. Real jobs, with higher pay and in significant numbers.

The American economy has always prospered when we invite trade with our global economic partners. Foreign companies employ U.S. workers. Foreign governments and individuals buy our goods. Foreign production helps U.S. companies compete in the global marketplace and allows the U.S. consumer to buy less expensive cars, televisions, cell phones and clothes.

Now is not the time to hobble U.S. companies and the American worker from doing what we do better than anyone else in the world - innovating and competing. Protectionist policies will not produce economic growth - anywhere. In fact, they are likely to have just the opposite effect. And, based on the data, it's just not necessary. Offshoring isn't the problem.

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