"Outsourcing" Is Not a Dirty Word

As if it were a surprise, it's another election season with negative campaigning. One of Obama's recent advertisements goes after Romney for outsourcing jobs. Romney replies by denying the allegations. Even Senator Harry Reid (D-NV) was bent out of shape over the fact that the U.S. Olympic team uniforms were made in China, as was John Boehner (R-OH). Aside from it being election year, what's the deal with being against outsourcing?

One of the primary arguments for protectionism is the argument of keeping jobs here [in America], also known as the "Buy American" argument. After great strides in technology, economic growth, and globalization, one would think that much of our consumption is done with products from foreign countries. This sentiment is prevalent for those who are against that which is "Made in China." The Federal Reserve Bank of San Francisco put out a report about a year ago addressing this issue. Two results peaked my interest. The first is that only 2.7% of our goods come from China. The second is that 88.5% of our consumption is of goods and services "Made in the USA."

Another argument for protectionism is national security. The idea is that if we become too dependent on other countries for goods, we compromise our national security. It's certainly an odd argument for the most militarily powerful nation in the world to make. Even if it weren't, it still doesn't hold water. If we look at something like gasoline, the commodity function in a global market. Energy independence is a façade because supply disruptions will affect gas prices regardless. The argument ignores the democratic peace theory. The final point, which is an offshoot of the second, if there were a high level of interdependence, as opposed to the misperceived "dependency,"nations would think twice before going to war since not only does war cost money, but losing the comparative advantages with liberalized trade go out the window, as well, which is a loss for both sides.

There is also a nostalgia for the manufacturing sector in this country. Seeing the decline of the manufacturing sector since outsourcing began in the 1980's makes some, particularly those on the Left, agitated. In addition to increased worker productivity, the reason why the manufacturing sector is declining is because the service sector is on the increase (at 79.6% as of 2011) . This is actually a good thing because it improves the quality of life here, as well as provide us with better job opportunities that don't involve back-breaking labor from either the agricultural or the manufacturing sectors.

If the gripe is about how we are exporting jobs during a recession, then outsourcing is nothing more than a convenient scapegoat because it actually doesn't have the negative effect on aggregate jobs that many think it does. According to the London School of Economics and the U.S. International Trade Commission, it really doesn't have a net effect on employment. And never mind that the United States still leads the world in manufacturing (producing 21% of the world's manufactured products) or that foreign investment in the United States exceeds U.S. investment abroad by $4 trillion.

The reason why outsourcing happens in the first place goes back to comparative advantage, a concept I remember from Economics 101 back in my undergraduate studies, and something that the Paul Krugman of 1997 was able to understand. If Country X can produce Product A for a smaller opportunity cost than Country Y, it is better for Country X to produce Product A. That way, Country Y can focus on Product B because its opportunity cost is lower than if Country X produced it. Resources are better allocated, and has the potential to create more jobs on both ends in the long-run. Throwing on tariffs or enacting other protectionist laws is only going to make things worse (e.g., Smoot-Hawley tariff, sugar tariffs). The erroneous assumption many make is that there is a fixed pie, and that someone's loss is someone else's gain, when in fact it's a positive-sum game where everyone benefits, even for those working in "sweatshops." It also means more final output for less costs. As Cato Institute scholar Daniel Ikenson points out,

Trade is not a competition between "our producers" and their producers." In fact, U.S.-based firms benefit from collaborating with foreign firms by carving up the production process into distinct functions and processes that suit each location's efficiencies and strengths. Just as trade enables U.S. consumer to benefit from lower-cost final goods, globalization enables U.S. producers to benefit from access to lower-cost resources put into the manufacturing system. That enables them to compete more effectively at home and abroad.

Focusing on outsourcing also diverts our attention from domestic issues that can help with encouraging labor growth in this country, whether it's dealing with our taxation system, burdensome regulations, bringing down Obamacare because of its unintended consequences, addressing government spending, or other much-needed structural reforms.

Finally, I'm also trying to understand this animosity towards outsourcing, and I'd like to take it to its logical conclusion. We don't just outsource to other countries. If we're worried about outsourcing to another country, why aren't we equally worried about outsourcing to another state? If you live in Virginia, for instance, you shouldn't be outsourcing your jobs or paying for goods and services from Michigan. So we should get rid of any interstate commerce since it's a form of outsourcing. And to take it a step further, those in Arlington, VA, shouldn't do any outsourcing to Fairfax, VA. This reductio ad absurdum argument points out a relevant truth: we outsource all the time, whether we decide to move or decide go to a certain mechanic, restaurant, or bookstore. On an individual level, we are trying to figure out whether it's better for us to provide the good or service ourselves or acquire it elsewhere. Businesses do the same thing. Outsourcing is the result of a cost-benefit analysis which benefits both the producer and the consumer. Rather than vilify outsourcing, we should embrace it as a vital aspect of international trade that enriches our lives.


3-6-2016 Addendum: The Washington Post ran a piece on outsourcing, and concluded that the net effect on employment was negligible.