Corporate Myth #1:
There is no outsourcing “crisis.” Only a very small percentage of all the jobs in the U.S. labor market have been lost due to shipping jobs overseas. Millions of jobs are destroyed in the U.S. every year, and millions more are created—a couple hundred thousand jobs lost to overseas outsourcing is just a drop in the bucket.
The Facts:
No one knows for sure how many jobs are being shipped overseas, primarily because the government neither collects this information nor requires companies to disclose it. According to most estimates, American workers have lost hundreds of thousands of white-collar jobs to outsourcing over the past few years and millions of jobs will be shipped overseas in the next five to ten years.
In professional and information technology sectors, jobs lost overseas account for a significant portion of the total net job loss since 2001. Job creation continues to stagnate in these industries even though investment and demand have recovered. Overseas outsourcing is an important component of the continued jobs crisis in these important sectors.
Goldman Sachs estimates 400,000–600,000 professional services and information sector jobs moved overseas in the past few years—accounting for about half of the total net job loss in the sector since January 2001.
The pro-outsourcing consulting firm Global Insight estimates 104,000 information technology jobs were lost to offshore outsourcing between 2000 and 2003, more than a quarter of the 372,000 jobs lost in the sector overall during the period.
The Economic Policy Institute found employment in U.S. software-producing industries fell by 128,000 jobs from 2000 to early 2004, while about 100,000 new jobs producing software for export to the U.S. were created in India over the same period of time.
Corporate Myth #2:
Increased trade and investment in services is good for the U.S. economy, because American workers gain more from foreign direct investment in the U.S. (or “insourcing”) than they lose from U.S. investment abroad (“outsourcing”). This foreign investment in the U.S. supports 6.4 million American jobs. If policymakers try to address the harmful impacts of outsourcing, they risk losing the benefits of insourcing.
The Facts:
There is no question foreign direct investment in the U.S. supports some jobs, but foreign investors actually create very few new jobs. In fact, foreign investors in the U.S. have made the national trade deficit worse and have cut millions of jobs from the American firms they acquired.
Foreign direct investment in the U.S. is not directly related to or dependent on U.S. investment abroad. While much U.S. investment abroad is involved in the production of goods and services that are then shipped back to the U.S., much of the investment in the U.S. is actually targeted at the domestic consumer market, not at producing exports for foreign markets. For example, Asian companies investing in pick-up truck facilities in the American South do so to avoid paying U.S. tariffs on pick-up truck imports by producing and selling their products in the U.S. (often with many parts imported from overseas). In fact, foreign-owned companies in the U.S. actually worsen the trade deficit by importing more than they export—these companies contributed $206 billion to the trade deficit in 2001 (the last year for which data is available).
The vast majority of the jobs supported by insourcing are not new jobs—they are jobs that already exist at U.S. facilities acquired by foreign investors. The Economic Policy Institute found the number of new jobs created by foreign investors averages only 25,000 a year: much less than the hundreds of thousands of jobs lost to outsourcing in the past few years.
In fact, foreign investors are actually destroying jobs at the U.S. firms they acquire. The Economic Policy Institute found the sum of the employment at firms already owned by foreign investors in 1991 and the initial employment at firms acquired or started by foreign investors in the subsequent ten years is 9.2 million. But the actual number of Americans currently employed by foreign investors is only 6.4 million, which means 2.8 million jobs were actually shed by foreign-owned firms in the U.S. in the decade from 1991 to 2001.
Finally, the trends in inflows and outflows of foreign direct investment are not encouraging. While the U.S. enjoyed a positive net inflow of foreign direct investment of more than $40 billion in 2001, direct investment flows deteriorated markedly in the next two years. In 2002, U.S. companies and individuals invested nearly $90 billion more abroad than foreigners invested directly in the U.S., and there was another net outflow in 2003 of nearly $64 billion.
Corporate Myth #3:
Offshore outsourcing is not a problem, because the U.S. exports more services than it imports. The service sector is one of the few areas where the U.S. runs a trade surplus instead of a trade deficit. The American service sector is the strongest in the world, and the surplus indicates increased international trade in services will be, on balance, good for the U.S. economy because it will support more jobs than it destroys.
The Facts:
The U.S. trade balance in services may not now look like the trade deficits in auto and textiles, but it is fast heading in that direction.
According to the U.S. Department of Commerce, the overall U.S. trade surplus in services has sunk from $90 billion in 1997 to just $51 billion in 2003—a loss of 43 percent in six years. If the surplus continues to fall at this speed, it will disappear completely within the next eight years.
Intra-firm trade in computer and information services is just one area in which the overall surplus has completely disappeared. The 1998 surplus of $400 million turned into a deficit of $1.4 billion by 2002.
The 1998 surplus in accounting, auditing and bookkeeping services also turned into a deficit by 2002. Meanwhile, the surpluses in architectural engineering, industrial engineering, management and consulting, and research and development plummeted during the same period by 36, 47, 50 and 80 percent, respectively.
Even these official figures may vastly underestimate the amount of services the U.S. imports, since the numbers are self-reported to the government by companies. Estimates from India of computer and data processing services exports to the U.S. analyzed by the Economic Policy Institute, for example, indicate the official U.S. figures may be undercounting these imports by billions of dollars.
Corporate Myth #4:
The only jobs that companies are shipping overseas are low-end jobs that should not be done in the U.S. anyway. Offshoring frees workers to find jobs that are more productive, and forces American companies to focus on higher value-added activities and innovate to create new technologies, goods and services. All of this benefits the economy in the long run.
The Facts:
There are no inherent limits on the kind of work that can be outsourced—as long as a service can be delivered over a phone line or internet connection, it is vulnerable to outsourcing.
In fact, the outsourcing trend appears to be moving from less productive and low-skilled jobs like call center work, to more productive and high-skilled jobs like engineering, radiology and research and design. According to Craig Barrett, CEO of Intel, “Unless you are a plumber, or perhaps a newspaper reporter, or one of these jobs which is geographically situated, you can be anywhere in the world and do just about any job.”
The Economic Policy Institute found industries in which new jobs are being created in the American economy actually pay 21 percent less, on average, than the industries losing jobs because of offshoring and other pressures. In addition, expanding industries are less likely to provide workers with health insurance than the industries cutting jobs.
There is simply no reason why more productive and valuable work will be safe from outsourcing in the future when such jobs are already being performed offshore today.
Corporate Myth #5:
Offshore outsourcing is good for the U.S. economy, because it saves firms money, allowing them to invest additional resources in more productive activities back in the U.S. If policymakers restrict offshoring, they will only make American firms less competitive and hurt the U.S. economy in the long run.
The Facts:
There is no guarantee companies that increase their profits through outsourcing to low-wage countries will turn around and use those increased profits to support jobs in the United States.
Even if firms do reinvest a portion of the profits generated by offshoring in U.S. employment creation, the net effect of shipping work overseas is likely to still be negative for American workers. A study by the McKinsey consulting firm claims five cents of each dollar of outsourcing returns to the U.S. to be reinvested. But this is still 95 cents less investment than the U.S. would enjoy if the company had never offshored its work in the first place.
U.S. companies’ profits have exploded over the past few years, perhaps partly due to the increased use of offshore work, but these profits have not been re-invested in the American economy in the form of higher wages and more jobs. While private profits have boomed in recent years, wages have stagnated and employment has plummeted. The Economic Policy Institute found corporate profits jumped by 62.2 percent in real terms since the first quarter of 2001, while private wage and salary income actually fell by 0.6 percent in real terms.
Corporate Myth # 6:
Policymakers should not take any action to restrict offshoring, because any such action at the state level would violate the Constitution, and restrictions at the state or federal level would violate international trade rules. If policymakers try to limit outsourcing, it will set off a trade war that will ultimately only harm U.S. interests.
The Facts:
Under the American system of federalism, States traditionally have a large degree of autonomy over how they spend their tax dollars on the procurement of goods and services.
State laws giving preference to goods made locally and nationally—“Buy Local” laws and “Buy America” laws—have been on the books for years, and have largely withstood judicial scrutiny.
These laws have been upheld under the well-accepted “market participant” exception to the commerce clause of the U.S. Constitution, which allows states to give less favorable treatment to foreign and out-of-state providers when they do so as a “market participant”—that is, as a direct purchaser in the market using state tax revenue.
The same logic that allows these state preferences in the procurement of goods should apply equally to the procurement of services.
Though some new trade agreements attempt to limit this procurement authority at the state and federal level, there are a number of legal actions that can still be taken to limit the offshoring of public contracts under these agreements.
The vast majority of U.S. trading partners have no right to retaliate if federal or state governments decide to limit offshoring of public contract work. Of the World Trade Organization’s 147 members, only 28 (including the U.S.) have signed the WTO Agreement on Government Procurement, and its rules only apply to those countries that have signed on. Additional countries are negotiating bilateral Free Trade Agreements with the U.S. that contain similar rules, but so far these rules have gone into effect with regard to only a few additional countries.
Regarding every other country in the world, the U.S. government and state authorities have no international obligations limiting their authority over procurement policy.
India, a common destination for U.S. services contractors, is not a signatory to any international procurement agreement. Even U.S. Trade Representative Robert Zoellick has defended limits on offshoring of federal contacts, remarking in a recent trip to India, “…one is not really in a position to complain about a government procurement arrangement if one does not belong to the [WTO] government procurement agreement.”
Finally, it is up to each state to decide whether or not to be bound by these trade agreements. Even if a previous state governor agreed for the state to be bound, often this was done without any consent from the state legislature, and subsequent governors can make a different choice. For example, fourteen states that are part of the WTO Agreement on Government Procurement refused to sign on to similar rules in a recent trade agreement with Central America.
Corporate Myth #7:
Restrictions on the ability of public contractors to offshore work will only end up costing taxpayers more money. Governments should find the best value for each taxpayer dollar, even if it means sending work overseas.
The Facts:
First, while it may cost more for companies to employ workers in good jobs in the U.S. than it does for them to ship jobs overseas where wages are lower and workers’ rights may be more easily violated, this is not a valid argument for subsidizing corporate outsourcing with taxpayer money. There is simply no guarantee businesses will actually pass on any savings from offshoring to consumers, or public contractors will pass on such savings to taxpayers.
The frequently cited case of a New Jersey call center contract offers a useful example. When the state’s call center contractor—eFunds—moved its call center from Green Bay, Wisconsin to India while the contract was in force, it continued to charge the state of New Jersey the exact same price for its services. All of the savings from shipping the call center jobs overseas went straight into the contractor’s pockets as profit.
When the state found the work had been moved to India and demanded eFunds perform the contract in New Jersey instead, eFunds used the opportunity to economically blackmail the state by demanding they pay an extra 36.9 cents per call in order for the work to be performed at a Camden call center. This extra cost included not just higher wages, but also rent, utilities, and equipment for the new facility. The cost may have been much less if the state had re-bid the contract rather than giving in to eFunds’ demands.
Second, tax money invested in job creation creates its own additional benefits for the community and the state—benefits that do not show up in the payroll records of state contractors. But they have real positive impacts on the local economy.
New local jobs provide employment for those who might otherwise need public assistance to secure housing, food, child care, and health care for their families.
Additional local jobs mean more money being contributed to the state and local tax base, and more spending dollars being reinvested in the local economy.
In addition, as in the New Jersey case, doing the work locally does not just create new jobs. It can also generate property payments, utilities fees, equipment purchases and other investments benefiting the local economy.
None of these benefits are available when tax dollars are used to subsidize the export of American jobs. When jobs are offshored, those thrown out of work may be forced to become tax users instead of tax contributors.
Corporate Myth #8:
Companies only send work overseas when there is a lack of skilled workers in the U.S. Companies need to be able to take advantage of the special skills and productivity of the millions of college-educated workers in China and India. If American workers want to compete, they need more education and training, not trade restrictions.
The Facts:
Companies offshore work not because they cannot find skilled workers in the U.S., but because they can find skilled workers in other countries who will do the work for pennies on the dollar.
More than 330,000 highly skilled computer system design, internet publishing, and search portal professionals have lost their jobs since January of 2001. An additional 276,000 workers in telecommunications have also lost their jobs. These skills still exist in the U.S., they are simply not being used by American companies.
The reason companies are offshoring is not because of a lack of skills, but to take advantage of significantly lower wages. In India, for example, a financial analyst makes 57 to 82 percent less than an analyst in the U.S. A telephone operator in India makes about a dollar an hour, compared to $12.57 an hour in the U.S.
