outsourcing

Sometimes Factories Move Abroad. That’s OK.

Writing in the New York Times recently, Louis Uchitelle calls for labor unions to be strengthened in order to prevent American firms from closing factories in the United States and shifting production abroad. Implicit in his argument is the notion that factories and the employment they provide are inherently desirable and the more the merrier.

Before addressing this point, however, let’s first acknowledge that the decline in the number of factories and factory workers in the United States is overwhelmingly a story about automation and improved use of information technology rather than trade or outsourcing. A widely-cited study by researchers at Ball State University found that increases in productivity explain almost 88 percent of such job losses.

Uchitelle’s contention, meanwhile, that greater unionization would stave off factory closures or even cause more to open in the United States is debatable. Sweden, the United Kingdom, and Japan, for example, all have significantly greater rates of unionization than the United States and yet have experienced higher percentage declines in manufacturing employment since 1990. And while he laments the “nearly neutered industrial unions” in the United States and their diminished proclivity to engage in strikes, a fondness for such worker protests hasn’t prevented France from similarly experiencing a greater percentage decline in factory jobs.

Manufacturing Employment, percentage change 1990-2016 

But even if increased unionization held the promise of fewer factory closures, it’s still not apparent why that outcome should be desirable. In fact, a blind obsession with the preservation of factory employment would almost assuredly make us worse off. 

Nike, Trade, and the Left’s “Race to the Bottom” Canard

To capitalism’s detractors, Nike symbolizes the Dickensian horrors of trade and globalization – a world ripened for mass exploitation of workers and the environment for the impious purpose of padding the bottom line. They are offended by President Obama’s selection of Nike headquarters as the setting for his speech, last week, in which he touted the benefits of the emerging Trans-Pacific Partnership agreement. But Nike exemplifies the redeeming virtues of globalization and illustrates how self-interested capitalism satisfies popular demands – including, even, the demands of its detractors.

Fealty to the reviled bottom line incentivizes companies like Nike to deliver, in a sustainable manner, what those genuinely concerned about development claim to want. U.S. and other Western investments in developing-country manufacturing and assembly operations tend to raise local labor, environmental, and product safety standards. Western companies usually offer higher wages than the local average to attract the best workers, which can reduce the total cost of labor through higher productivity and lower employee turnover. Western companies often use production technologies and techniques that meet higher standards and bring best practices that are emulated by local firms, leading to improvements in working conditions, environmental outcomes, and product safety.

Perhaps most significantly, companies like Nike are understandably protective of their brands, which are usually their most valuable assets. In an age when people increasingly demand social accountability as an attribute of the products and services they consume, mere allegations – let alone confirmed instances – of labor abuses, safety violations, tainted products, environmental degradation, and other objectionable practices can quickly degrade or destroy a brand. Western brands have every incentive to find scrupulous supply chain partners and even to submit to third party verifications of the veracity of all sorts of practices in developing countries because the verdict of the marketplace can be swift and unambiguous.

Nike remembers the boycotts and the profit losses it endured on account of global reactions to its association with “sweatshop” working conditions in the past. Mattel’s bottom line took a beating when some of its toys manufactured in certain Chinese factories were found to contain dangerous levels of lead paint. There have been numerous examples of lax oversight and wanting conditions, but increasingly they are becoming the exception and not the rule.

Enduring Myths that Obscure the Case for Free Trade

Most economists agree that free trade works better than restricted trade to increase the size of the economic pie. By enlarging markets to span national borders, free trade increases the pool of potential producers, consumers, partners, and investors, which permits greater specialization and economies of scale – both essential ingredients of per capita economic growth.

But, in practice, free trade remains elusive. It is the exception, not the rule. Sure, many tariffs and other border barriers have been reduced in the United States (and elsewhere) over the years, but protectionism persists in various guises. There are “Buy American” rules limiting government procurement spending to local firms and US-made products; heavily protected services industries; seemingly endless incarnations of agriculture subsidies; import quotas on sugar; green-energy and other industrial subsidies; shipbuilding and shipping restrictions; the Export-Import bank; antidumping duties; and, regulatory protectionism masquerading as public health and safety regulations, to list some. Ironically, protectionism is baked into our so-called free trade agreements. It takes the form of rules of origin requirements, local content mandates, intellectual property and investor protections, enforceable labor and environmental standards, and special carve-outs that shield entire products and industries from international competition.

Trade agreements may be the primary vehicle through which U.S. trade barriers are reduced, but they are predicated on the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by negotiators on the other side of the table. If the free trade consensus were meaningful outside of economics circles, trade negotiations would be unnecessary. They would have no purpose. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on domestic consumers and businesses.

Does Foreign Outsourcing Supplant or Augment Domestic Economic Activity?

Voters in Massachusetts, Georgia, Illinois, and elsewhere are being treated to a little 2012 redux, as desperate candidates try to paint their opponents with last election’s popular pejorative: “Outsourcer!” You may recall the accusations exchanged between President Obama and Mitt Romney two years ago, as each sought to portray the other as more guilty of perpetuating the “scourge” of outsourcing. At the time, I faulted Romney for running away from what I thought was his responsibility (as the businessman in the race) to explain why companies outsource in the first place, and how doing so benefits the economy and leads to better public policies. Had he done so, his explanation might have sounded something like this. 

For many people, the term outsourcing evokes factories shuttering in the industrial midwest only to be ressurrected in Mexico or China to produce the exact same output for export back to the United States. While a popular image of outsourcing, that particular rationale – to produce for export back to the United States – accounts for less than 10 percent of the value of U.S. direct investment abroad (as this paper describes in some detail). Over 90 percent of outward FDI is for the purpose of serving foreign goods and services markets and for performing value-added activities in conjunction with transnational production and supply chains. In most industries, it is difficult to succeed in foreign markets without some presence in those markets. And without success in foreign markets (where 95% of the world’s consumer’s reside), it is more difficult to succeed at home.

So, does “outsourcing” really deserve its bad reputation? Does it really hurt the U.S. economy?  Well, the U.S. Bureau of Economic Analysis collects and compiles the kinds of data that can help us begin to answer these questions, including data about inward and outward foreign direct investment, and the activities of U.S. multinational corporations – both U.S. parents companies and their foreign subsidiaries. The scatterplots presented below reflect the relationships between annual changes in various performance metrics (value added, capital expenditures, R&D expenditures, sales revenues, employment, and compensation per employee) experienced by U.S. parent companies and their foreign affiliates. Each point on each plot represents a combination of the annual percent change for the affiliate (horizontal axis) and the parent (vertical axis) in a given year. 

If a foreign hire comes at the expense of a U.S. job, if ramping up production abroad means curtailing output at home, if a $100 million investment in a new production line or research center abroad means that plans for a new line or center in the United States get scrapped, if foreign outsourcing is as bad as its critics suggest, then we should expect to see an inverse relationship (at least not a direct or positive relationship) between the economic activities at U.S. parents and their foreign affiliates. We should expect to see most of the points in the upper-left or lower-right quadrants of the plots below.

Anemic Business Investment Indicts U.S. Policies

Since the beginning of the Great Uncertainty – the period that began with the “stimulus,” the auto bailout, the push for another major entitlement program, Dodd-Frank, the regulatory dam burst, the subsidies for favored industries, and the proliferation of distinctly anti-business rhetoric from the White House – President Obama has appeared puzzled by the dearth of business investment and hiring. Go figure.

Nonresidential fixed investment fell off a cliff in 2009, and has yet to recover even in nominal terms. As a share of GDP and relative to the trend in investment growth prior to the 2008 recession, the picture is more troubling still. If tomorrow’s wealth and living standards are functions of today’s investment – and they are – reversing the decline in investment should be the economic priority of U.S. policymakers. 

Instead, the administration has been cavalier about the problem and aloof to real solutions, choosing to view investment as a casualty of partisan politics, as though business is intentionally holding back to sully the economy on this president’s watch. Such narcissism has obscured the White House’s capacity to grasp the power of incentives.

It’s not just domestic investment that is lagging. Foreign direct investment in real U.S. assets is also on the decline. The United States is part of a global economy, which means that U.S. and foreign based businesses can invest, hire, develop, produce, assemble and service almost anywhere they choose. And that means the United States is competing with the rest of the world to attract and retain investment. Of course, the implication of this – whether policymakers know it or not and whether they like it or not – is that globalization is serving to discipline bad public policy. Policies that are hostile to wealth creators chase them away, while smart policies attract them and harvest their fruits.

Business investment is ultimately a judgment about a jurisdiction’s institutions, policies, human capital, and prospects. As the world’s largest economy featuring a highly productive work force, world-class research universities, a relatively stable political climate, strong legal institutions, accessible capital markets, and countless other advantages, the United States has been able to attract the investment needed to produce the innovative ideas, revolutionary technologies, and new products and industries that have continued to undergird its position atop the global economic value chain. 

The good news is that the $3.5 trillion of foreign direct investment parked in the United States accounted for 17 percent of the world’s direct investment stock in 2011 – more than triple the share of the next largest single-country destination. The troubling news is that in 1999 the United States accounted for 39 percent of the world’s investment stock.

What the Candidates Won’t Explain about Outsourcing

Like almost everything about the 2012 presidential campaigns, the bickering between the major party candidates over who is most responsible for shipping jobs overseas has been banal and utterly uninformative. While politicians have scared many Americans with hyperbolized sales pitches about the costs of foreign outsourcing, most people remain in the dark about the causes and benefits of outsourcing. What is foreign outsourcing anyway? Why do some businesses invest in sales operations, research and development, production and assembly operations, or the provision of services abroad?

The Trouble with Zakaria’s Assessment of the Economy

Fareed Zakaria is a good journalist. But he’s also human. In his Washington Post column yesterday, Zakaria concludes that President Obama has a stronger case to make for his economic prescriptions than does Governor Romney. However, that conclusion—at least as presented in the column—is premised on a misreading of some recently published data.

Are U.S. Multinationals to Blame for High Unemployment?

Many Americans believe the unemployment rate remains stubbornly high because U.S. multinational companies have been outsourcing and offshoring jobs to low-wage countries at the expense of jobs at home. And they believe this in part because politicians and the media tell them it’s so, even though it isn’t.

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