The Outsourcing Canard

“We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”

    -President Barack Obama, Speech before Joint Session of Congress, February 24, 2009

To further Chris Edwards’ post earlier today, demonizing multinational corporations has long been a Democratic Party mainstay on the campaign trail. But the campaign is over. And given our colossal budget and debt disasters, it is almost criminal that our political leaders continue to tilt at windmills.

Chris notes that “U.S. corporations are moving investment and profits abroad, but it is because we have the world’s second highest corporate tax rate, not because of special loopholes as the president keeps implying.”

Punitive U.S. tax policy is beyond question a strong incentive for U.S. companies to invest capital and reinvest profits abroad. But there is also the fact that 95 percent of the world’s population lives outside the U.S. border. And those people have a hankering for U.S. products and services.

The main reason U.S. companies make direct investments abroad is to serve foreign demand, plain and simple — although politicians characterize competitive efforts to win foreign market share as “shipping our jobs overseas.” In many industries, it makes more sense to serve foreign demand through production operations in those countries (or in that region) than it does to produce in the United States and then export. Likewise, foreign-owned companies like Honda, Toyota, BASF, Thyssen-Krupp, Michelin, and Anheuser-Busch InBev find that it makes more sense to serve U.S. demand by producing in the United States. (The Organization for International Investment has a lot of useful information about “Insourcing” at its website.)

But there’s no need to reinvent the wheel here. My colleague Dan Griswold recently wrote a concise, fact-filled paper, attempting to interpret President Obama’s campaign pledge (and now presidential pledge) to “stop giving tax breaks to corporations that ship jobs overseas.” Dan’s analysis addresses three distinct questions raised by Obama’s pledge:

  1. Why do U.S. multinational companies establish affiliates abroad and hire foreign workers?
  2. What kind of tax breaks are they receiving?
  3. Should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?

You should read Dan’s paper and consider sending a copy of it to the White House. But here are some statistical highlights:

  1. More than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries.
  2. In 2006, U.S. corporations sold $3.3 trillion in goods (and $677 billion in services) through their majority-owned affiliates abroad, which was more than 6-times the value of U.S. exports. About 60 percent more services were sold through foreign affiliates than were exported from the U.S.
  3. U.S. corporations don’t use foreign operations as an “export platform” back to the U.S. (which is the primary gripe of those who oppose U.S. corporate investment abroad):
    • Almost 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or re-exported to consumers in third countries outside the U.S.
    • More than half of the production of U.S. affiliates in China and Mexico is consumed in those markets, while only 17 percent of that production is sold to customers in the U.S.
    • There is no evidence that expanding employment at U.S.-owned affiliates comes at the expense of overall employment by parent companies back in the U.S.; in fact, there is a positive relationship between employment in the U.S. operations and employment in the foreign affiliates
    • In fact, foreign and domestic operations tend to move in tandem
  4. U.S. corporations don’t get any tax breaks from operating overseas; income on foreign operations that is repatriated is taxed at the much-higher-than-OECD-average U.S. corporate rate.
  5. Thus, “finally ending tax breaks for corporations that ship jobs overseas” can only mean extending the long arm of the U.S. tax code to apply to earnings on foreign operations that are not repatriated.
  6. And that would mean: “less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.”