Why Outsourcing Helps and Protectionism Hurts the U.S. Economy
There is a balanced amount of research on the advantages and disadvantages of offshore outsourcing, with the experts taking the most balanced view citing the dangers of protectionism that any snap judgment of outsourcing may bring on. The reality of outsourcing is that it’s a global business dynamic that reflects company’s need to follow the lowest cost of manufacturing, service and support around the globe. In addition, the Internet has forced the responsibility of global competition on previously parochial, regionalized businesses. To see any company as regionalized and somehow protected from global competition is to deny the realities of globalization and the fact that every company, every day, competes on a global playing field. The intent of this paper is to provide an overview of a series of articles and research discussing the impact of offshore outsourcing on the American economy, and ultimately if it is better to be challenged competitively, or more prudent to protect American industries.
Offshore Outsourcing Has Become the Political Football of Choice
Ms. Liz Peek (2006), columnist for the New York Sun presents a balanced, factual and analytically precise analysis of the ongoing debate of Democrats and their pursuit of protectionism in the name of preserving American jobs and industries vs. The arguments of Steve Forbes and those of anti-protectionist conservatives who see protectionism as coddling American industry and unduly insulating it from global competition.
The event Ms. Peek was covering in New York was the recent CEO Forum sponsored by Forbes Magazine. The foundational elements of the debate of the apparent losses to American industries and individual worker livelihoods is amply and accurately analyzed by Ms. Peek at the front of the article, and she then progresses to illustrate Mr. Dobbs’ and Mr. Forbes’ perspectives.
Mr. Dobbs admittedly plays to the labor audiences and says that while he does in theory support outsourcing he feels that the current economic situation is far from free market. In a sense Mr. Dobbs is much like the American Democratic party, playing to the labor constituencies that have dropped from 20.1% of all age and salary workers in 1983 to just 12.5% of the total workforce last year. Mr. Dobbs also cites the burgeoning deficit and the fact today there is a $5 trillion debt load the company carries. Mr. Forbes has often countered these arguments with the impressive statistic that the U.S. economy has grown 25% since September 11, 2001 and that the expansion of the U.S. economy overall is faster than the Chinese economy, and further, median household wealth is up 43% in the last ten years.
The key take-away from the debate at the CEO Forum was not necessarily how key economic indicators are defining varying degrees of growth or lack thereof in the American economy. Rather, the discussion made one very glaring and uncomfortable fact true; unions and their usefulness are quickly losing relevancy, and in a globally competitive arena, labor costs will make or break the long-term competitive strength of any nation. Artificially inflated labor rates, as Ford Motor Company has done for example, are a strategy that no longer works as the auto company’s recent financial performance proves. Jobs and professions that require brains over brawn and muscle dominate high growth professions, and while Democratic party officials worry about the loss of their constituents from unions, the broader fear that needs to be confronted is equipping the next generation of American workers with the intellectual tools to compete, not simply an attitude of entitlement that tends to pervade households where multiple generations have been in unions.
In another classic example of how offshore outsourcing is turning into a political football candidates are using to further their own careers is the ambitious use of offshore bashing by U.S. Congressman Bernie Sanders (I-Vt.) who is jockeying for a Senate post. In what is increasingly becoming a typical good vs. evil stance on outsourcing and its effect on local workers, U.S. Congressman Bernie Sanders (I-Vt.) has come to the aid of a group of workers laid off due to their manufacturing jobs being sent offshore by local companies. Mr. Sanders closely has aligned himself with labor and staunchly gone after health and other severance benefits on their behalf from the U.S. Department of Labor. It is arguable if the workers actually never received the benefits from the article. Gram (2006) does an excellent job of showing how Representative Sanders is working to coordinate and organize the labor parties of his home state, seeking as much visibility as possible as their evangelist fighting for their jobs and against outsourcing. While many see these actions altruistic, Representative Sanders has his eye on the U.S. Senate seat being vacated by Senator James Jeffords (I-Vt.) who has retired and left the second Senate seat in Vermont open. Battling Sanders is Republican opponent Richard Tarrant, a former founder and CEO of IDX Systems, a medical software company. Mr. Tarrant, by contrast, sees free trade as integral to global peace, and has even remarked that the quickest path to peace with China is unrestrained free trade. Mr. Tarrant argues that the 21st century is more aligned with a more educated and effective workforce that competes globally. Sanders and others argue back that none of Mr. Tarrant’s rhetoric has created jobs or saved them in Vermont. While Gram (2006) does not overtly discuss the heavy labor union emphasis of Vermont and its liberal ideological tendencies, he does illustrate through the intensive politicking of Sanders that outsourcing can be turned into a large and ugly force locally, capable of generating votes for Sanders. Sanders, it seems, has found an ideological foe to do battle with and gain votes in the process.
Offshore Outsourcing Hits Iowans Hard
Iowans have traditionally been proud of their core industries, including farming, manufacturing at Alcoa, Maytag and other well-known manufacturers who have over the years steadily built brands of national and global prominence based on solid Midwestern American values of delivering reliable products at a fair price. Iowa has been a microcosm of the shift in outsourcing however, and Hitt (2006) fully illustrates the nature of the duality of American industry. During November, 2006 the political dynamics of many congressional districts and entire states metamorphosed from seeing global competition as the path to greater local prosperity to an evil that must be battled and cut off through extreme measures of protectionism. it’s as if the communities that two local politicians battle for votes from have decided to enlist government help in fighting the fear of jobs moving overseas. Mr. Hitt uses the political competitions of Mike Whalen, a Republican businessman, and Mr. Bruce Braley, a Democrat, to illustrate how divisive protectionism is becoming even in smaller communities across the country. Mr. Braley argues that the current Republican President, by playing fast and loose with global trade policies, has directly sacrificed many of the jobs lost from Iowa, including 2,000 workers laid off from Maytag. Mr. Whalen counters with the fact that Alcoa produces parts for Boeing and Airbus; and in these customers globalization is the key driver of business growth. The juxtaposition of these two candidates and the tendency of American workers to look for the answer to complex problems from their government come out loud and clear in the article. What is missing however is recognition that even if protectionist measures do take hold and that while today the challenges look difficult, to try and insulate a state from them only exacerbates them in the future.
Evaluating Lou Dobbs’ Commentaries on Offshore Outsourcing
Lou Dobbs has transformed himself from conservative economist commentator to fiery critic of American outsourcing and what he perceives as inadequate immigration policies. The commentator was interviewed briefly by McCarthy (2005), showing a strong orientation towards being the strident critic of both the Republican administration and the Democratic party that panders to both big business and constituents, looking for a happy medium to please everyone. Dobbs’ anger is mostly directed as corporations who say “The ultimate message in outsourcing is this: America be damned. it’s all about the lowest cost,” and in his indignation over this attitude the CNN anchor has established himself as an iconoclast of the anti-outsourcing and protectionist segments of the American public. Dobbs’ legacy is decidedly Republican, as is his current ideological leanings, yet he sees the current Republican Administration as trying to be all things to all people specifically on the issue of immigration, outsourcing and the repealing of the Sarbanes-Oxley Act, which states every publicly-held corporation must report financially material events within 72 hours to both their shareholders and the investing public. Dobbs’ insistence on the federal deficit also is a major factor in the weakening of the middle class and the eventual reduction in standard of living for Americans is consistent ironically with many of the Democrats who seek out debates with him both in print and in person. Dobbs’ controversial style and blunt approach have made him an easily criticized target of immigration groups, specifically those from Mexico and throughout the Latin American nations. Dobb’s support of stringent immigration reforms however gains him points with the far right of the Republican Party. Lou Dobbs is best known however for this crusade to save the middle class of America by fighting outsourcing and the reduction in wages of American workers.
Making American Manufacturing Lean: A Perspective
Looking first at the progression of outsourcing from low-skill and low wage jobs to intermediate and finally high-skill jobs including design and production planning, Link (2006) first illustrates through a series of comparisons how widely divergent the costs per labor hour are in the United States relative to nations now generating the majority of outsourcing manufacturing activity. The contrasts are remarkable, and while the author does not describe what isn’t available in these locations for manufacturing, including reliable electricity (which is difficult to find in India), or sustainable and replicable production processes where the experience effect can contribute to a drop in production costs (as is the case in many chaotic Chinese manufacturing operations), the author tends to see the outsourcing decision purely on cost and does not add value in terms of the costs associated with moving to a 3rd world nation to do manufacturing.
Instead, the author takes the approach of looking at the concepts of lean manufacturing as the true point of differentiation and long-term growth of American manufacturing. Link (2006) argues that efficiency and cost reduction through lean manufacturing techniques can actually forestall or even stop the outsourcing of jobs en masse. The other side of this argument however is that many Indian outsourcing companies including HCL, Infosys, Tata and others can deliver a 40% reduction in the costs of doing a complex task or process, which would ironically alleviate the pressure on companies to outsource their core business. The author tends to applaud the Toyota Production System too often, and could have made the entire article stronger by showing the ironies of Toyota themselves doing much of their outsourcing work on non-strategic parts of their business so they could focus on the core aspects of next generation auto development.
While American politicians look to capitalize on the pervasive public mood against offshore outsourcing, the reality of the situation is that its much more complex and intricate of an issue economically than the emotional reactions political candidates work so hard to elicit to get votes. Outsourcing is hot as a topic in the United States right now because we’re for the first time feeling the pinch of being the have-nots of job influx at the middle and lower ends of the economic spectrum. What the harshest critics seem to not see is that offshore outsourcing is the critical wake-up call for the United States to start getting higher levels of education for its students, invest heavily in the math and sciences, regain world leadership in patents, and in general regain dominance in science and engineering. Further, it makes much more sense to look at any given company looking to do offshore outsourcing and make the existing processes they have more efficient. By offshore outsourcing before taking this step, companies are just automating mediocrity. There is no simple answer to offshore outsourcing. Yet the message to the United States is very clear. it’s time to step up efforts to make companies more lean, efficient and intelligent in their processes, gain greater competitive strength in science and math, and look for ways to lead the world in patents and new innovation. The bottom line is that the Internet and globalization has forever changed the face of global competition, and that offshore outsourcing is going to continue and grow due to cost advantages. For American businesses they need to find how to find greater efficiencies so that outsourcing is less of a strategy of last resort to survive but more of a strategy to offload non-essential processes so the core parts of any business can accelerate and grow.
Peek (2006) – Shrinking Unions Push Democrats toward Protectionism, New York Sun newspaper. Published November 14, 2006 and accessed from the Internet on February 9, 2007 from location:
Gram (2006) – Sanders’ vows to continue fighting outsourcing of U.S. Jobs. Boston.com and Associated Press. September 23, 2006. Accessed from the Internet February 9, 2007:
Hitt (2006) – Protectionist Stance is Gaining Clout. Greg Hitt, Wall Street Journal. November 6, 2006. Page A4. Accessed from the Internet on February 9, 2007 from location: http://online.wsj.com/public/article_print/SB116277226395813918-TvtW_7IYYvHHLZCbZTWcbV3_aQc_20061205.html
McCarthy (2005)- Dobbs Fires Away Against Outsourcing. USA Today. February 22,2005. Money Section. Accessed from the Internet on February 9, 2007 from location:
Link (2006) – Lean Manufacturing Can Save American Manufacturing. Jack Rick. February 20, 2006. Maintenance World Magazine. Accessed from the Internet on February 9, 2007 from location:
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