Outsourcing, Oh What Demagoguery!

July 11, 2012
The problem is not outsourcing but rather it is inappropriate outsourcing—purchasing abroad products that could be made as or more cost-effectively at home.
No issue is more misunderstood, or been more purposefully confused by the Romney and Obama campaigns, than outsourcing. Outsourcing is merely the importing side of international trade—purchasing abroad goods and services, and components to assemble final products in the United States. Just about everyone who has had a choice between buying an American-made product or an import—a car, a wedge of cheese or a movie on-line—must admit that two-way trade based on legitimate comparative advantages is a good thing.
If Americans expect folks abroad to purchase Boeing aircraft and Intel processors, then they had better be prepared to outsource some of what they purchase directly, or through the firms that assemble products domestically and their government. The problem is not outsourcing but rather it is inappropriate outsourcing—purchasing abroad products that could be made as or more cost-effectively at home. That happens when: U.S. policy throws up unnecessary barriers to domestic production; foreign governments unfairly subsidize businesses or simply keep out competitive American products; or U.S. firms have an inappropriate bias toward foreign sourcing. Those swell the trade deficit, which imposes great costs, and both President Obama and Governor Romney own some of that problem. President Obama’s bans and tough restrictions on oil and gas development in the Gulf, off the Atlantic and Pacific Coasts and in Alaska do not benefit the global environment if those do not reduce U.S. petroleum use but merely shift U.S. sourcing abroad, where environmental risks may be less effectively managed. EPA imposed limits on CO2 emissions that shift manufacturing to China where similar regulations do not apply are a similar problem. Both kill U.S. jobs without an environmental benefit.

Unfair Playing Field with China

China keeps its products artificially cheap, and forces the relocation of U.S. manufacturing to the Middle Kingdom by maintaining an artificially undervalued currency, imposing high tariffs and outright exclusions on competitive U.S. products.

Billions of dollars of U.S. stimulus money were spent in China, instead of the United States, and President Obama could have excluded those products—either through the initial legislation or by executive order—without violating WTO rules but chose not to do so. Moreover, he has failed to take action regarding U.S. procurement generally, or by broadly forcing China’s hand on its mercantilist practices, as he promised to do when campaigning for the presidency in 2008.

Private equity has an inherent bias toward outsourcing that is neither helpful to the firms it reorganizes nor healthy for the U.S. economy.
Essentially, private equity purchases distressed businesses, and looks for quick profits by slashing wasteful employment—unnecessary jobs that would be lost anyway if the firms failed—and replacing ossified management. However, by seeking large returns in a brief period, private equity emphasizes selling brands and intellectual property (patents) in repackaged firms that are generally loaded up with debt. To boost cash flow and service debt, these firms are more likely to sell off valuable brands and patents, and to strip away and offshore manufacturing that supports domestic R&D and could contribute greatly to the future value of the firm and U.S. competitiveness and employment.

Unnecessary outsourcing is responsible for at least half the $600 billion U.S. trade deficit. Eliminating half of that deficit would boost domestic demand and GDP by about $500 billion and add 5 million jobs.

Export and import-competing industries spend at least four times as much on R&D as the private business sector as a whole. Reducing outsourcing, by increasing R&D, could boost U.S. GDP by one or two percentage points. A U.S. economy growing at 3 or 4 percent a year, instead of its current 2 percent, would have far fewer budget problems at the federal and state levels, and far more resources to address issues like health care, the solvency of social security and finance an adequate national defense and space exploration.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland.

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