The Politics of Outsourcing
August 18, 2003

By Jim Lorick

In concept, free trade and open markets are good things. Capitalism has proven to be such a good thing that countries all over the world are shedding their protectionist policies and hopping on board the globalization supertrain. The Soviet Union, our old twentieth-century nemesis, has come to worship at the high altar of liberal economics, while China, the last socialist superpower on the planet, opens its markets a little more every day.

But can global business-to-business bonding be too much of a good thing? Or perhaps more precisely, what do we do as a nation experience when the good thing for corporate America is devastating to American workers? This divergence of interests, so hotly debated in the 1980s and 1990s during the waning of America's manufacturing sector, is again at the heart of a national debate as legislators consider the consequences of offshore information technology outsourcing.

The harsh reality is that the pressures of global competition force a company in Baltimore to enter the world market for widgets at the same or better price as a company in Bangalore. American consumers get cheaper widgets, but American widget companies are forced to employ foreign labor, and American widget-workers are out of a job.

The cycle looks fairly familiar. Protests from displaced workers stimulate politicians who are looking to turn those protests into votes. Politicians promise to stem the tide of jobs flowing overseas. Tariffs and other trade barriers are shoddily and hastily erected. Jobs flow overseas regardless, while tariffs and trade barriers remain as a form of industrial welfare.

In the debate over manufacturing jobs, the discussion quickly became focused on the market cost for goods. Mr. and Mrs. America may have preferred that the clothes they bought for their children were made by American workers, but they were far more concerned about the family budget. A thirty dollar pair of Levi's made in America could not compete with a twenty dollar pair of Bugle Boys made in China, particularly when even at that price differential, the profit margin for Levis was shrinking. Are Americans really going to get so worked up about IT jobs moving to India that they will be willing to pay more for hardware, software, and tech support? Doubtful.

What sets this discourse apart from the manufacturing context of the 1980s and 1990s is that the American workers being affected aren't blue-collar employees, but middle-class programmers. The political implications aren't immediately clear. While unions can clamor for trade protections, and agricultural interests can lobby for price protections, information technology workers don't have a ready organizational structure with which to influence policy makers. Nevertheless, some legislators have taken up their fight in an effort to protect American jobs (and garner some votes in the process). Representatives from several States that have felt the greatest impact from offshore outsourcing are leading the charge to protect our defenseless IT cowboys from the hostile Indians.

Maryland, Washington, Connecticut, Missouri, and New Jersey are considering laws banning offshore outsourcing of government tech-services contracts. On the federal level, in early June Congress began considering ways to close a legal loophole that allows foreigners to use guest worker visas to service clients in the US. Advocates of the change suggest that the loophole, like actual physical offshore outsourcing, displaces American workers with foreign nationals. Consistent with that concern, Representative Nancy L. Johnson (R-Conn.) has asked that large insurance companies disclose how much of their IT work is being done by foreign nationals in the U.S.

Ironically, it is the very technology that provided American IT workers with so many high wage jobs that is now their undoing. Reliable communications technology and the radical expansion of the speed and penetration of the Internet into the developing world have made location irrelevant. We have no way of knowing the physical location of the screen on which an email service query will pop up - and as long as the question is answered correctly in something that passes for English, we don't really care.

Education is the other major change that has been a key factor in offshore outsourcing. America has long been exporting its intellectual wealth in the form of university educations sold to foreign nationals. For decades our top engineering programs have trained the world. Foreign universities and corporations are now staffed with some of the best and brightest to ever graduate from America's premier academic institutions. India alone is said to have over 500,000 computer engineers.

Since contracts to service US companies represent nearly 70% of business in India, government and business leaders in India are following outsourcing debate in the US with passionate concern. Following the example of their American industrial counterparts, India's software association, Nasscom, has hired Hill & Knowlton, one of American's foremost public relations firms, to help shape the debate. The Indians offer the familiar argument that a rising tide lifts all boats and that the existence of IT capacity in India supports the continued expansion of the market for American computer and electronic products. They are also quick to point out that many of the dollars that flow into India from the US flow right back out in the form of American goods and services purchased by Indians. The Indians are also bold enough to suggest that the world community is more than a little weary of the hypocrisy of American trade policy - a policy that pays lip service to free markets except in circumstances in which America cannot compete. The Indian press also notes that offshore outsourcing was not such a great concern while the US tech sector was booming and Indian workers were helping US companies to stay competitive in the world market.

A key point in the public policy debate, however, looks at the real cost of wages. Other countries do not have to include costs such as environmental regulations, worker safety regulations, employment taxes and benefits in the hourly labor cost calculus. Other countries do not have a climate that is as litigious as our own. Other countries do not allow workers the freedom to organize that we accord our workers.

So what is to be done about the offshore outsourcing problem? If rational heads prevail, absolutely nothing. Growth in the wealth and sophistication of the developing world is both inevitable and desirable. The more economically interdependent and the wealthier all nations become, the harder they will work to create and preserve global stability.

The harder issue is defining state and federal responsibilities with respect to workers who are displaced by the new economic realities. These workers must be supported in transition and retrained to contribute to the economy. Yet, can government provide any relief at all if we continue to devote limitless revenues to foreign military adventuring and re-building war-devastated nations? Can we tackle rehabilitating the work force with revenue streams so truncated by economic contraction and radical tax cuts that we can barely afford to keep the lights on in the White House? Clearly, tackling the issues that continue to erode the health of the domestic economy and redefining America's role in the larger world are both difficult and politically risky propositions. As always, when times get tough, it is easy and popular to shake one's fist in the general direction of something foreign and promise to protect American workers from the perils of legitimate free market competition, but enacting protectionist legislation will hurt American consumers, corporations, and our reputation in the world as a free, fair, and open society, which may be our most valuable commodity.

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