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“Outsourcing” eliminates jobs, but might create more
By Dr. Wayne Carroll
“Outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run. Outsourcing is just a new way of doing international trade.”
Those comments, delivered in February by Greg Mankiw, President Bush’s chief economic adviser, created a political firestorm that will continue to flare up throughout the remainder of the presidential campaign season. It was certainly a political blunder for Mankiw to state things so clearly, but most economists — and both President Bush and Sen. Kerry — would probably endorse his comments, even if they wouldn’t do it within earshot of a microphone.
In today’s context, outsourcing refers to American companies shifting their production from the U.S. to other countries where labor is cheaper. In the most commonly cited examples, U.S. companies hire software engineers in India to write computer programs, or college-educated Indians to provide technical help to U.S. consumers with home computers, or Indian accountants to complete tax forms for American tax accountants. Closer to home we see Ashley Furniture “outsourcing” some steps in its production to workers in China and Brazil.
But these are just new twists on an age-old verity of international trade: Often it pays to buy goods and services abroad, if they’re cheaper there.
Not surprisingly, economists have worked for hundreds of years to understand international trade. More surprisingly (given our propensity to disagree on everything else), economists have reached a consensus on the most important questions regarding trade. At the heart of this consensus is the Law of Comparative Advantage, which essentially says that if any two countries trade with each other — with each country exporting the goods that it can produce more cheaply — then this trade can potentially make both countries better off.
Throughout history, international trade has been a potent source of economic growth. The American colonies and the early American republic prospered two and three centuries ago by exporting tobacco and other crops to Europe in exchange for textiles and other manufactured goods. In the last few decades, international trade has fueled rapid economic growth in Japan and other Asian countries, in the U.S. and Europe, and in most of the rest of the world.
Unfortunately, while the international market offers benefits for countries that engage in trade, those benefits are never spread equitably within each country. If the Chippewa Valley buys furniture from China and sells Cray computers to Europe, consumers here enjoy lower furniture prices, and there are more jobs for workers at Cray.
But many workers who used to make furniture in the Chippewa Valley have lost their jobs — the headlines would say that the jobs “migrated” to China. The logic of the Law of Comparative Advantage tells us that the gains from trade (to exporters and to consumers and businesses who buy imports) must be larger than the losses (suffered by those who are competing with imports), so on the whole we are better off. But the losses are nonetheless painful.
The complicated tradeoffs raised by free trade are illustrated well by the furniture industry, and by Ashley Furniture in particular. According to media accounts, the share of foreign manufacturers in U.S. furniture sales has risen in the last 10 years from about 20 percent to 55 percent, and it’s expected to rise to over 75 percent in the next few years. As a result, over 30,000 furniture manufacturing jobs in the U.S. have been lost in the last four years, including about 2,500 in Wisconsin.
But while many American furniture manufacturers have been calling for new limits on furniture imports to the U.S., Ashley Furniture has opposed barriers. Ashley has found that it is profitable to import furniture from China, Brazil, and other countries to sell in the U.S. And in Ashley’s case, the cheaper imports have helped the company expand its sales in the U.S., leading to an increase in jobs at home.
According to media accounts, Ashley’s U.S. employment has grown from 350 workers 20 years ago to about 6,000 today, with 2,500 of those working in Wisconsin.
Given the broader benefits of free trade and the inevitability of cruel losses for some workers and businesses, policymakers face a difficult dilemma. Some argue for restrictions on trade — perhaps by prohibiting outsourcing or charging tariffs on imports, for example — to reduce the losses. But these barriers also eliminate the gains from trade, which outweigh the losses for the nation as a whole.
An alternative is to create government programs that ease the pain and smooth the transition for victims of “outsourcing.” For example, the federal Trade Adjustment Assistance program funds retraining and health benefits for U.S. factory workers who lose their jobs to import competition.
Both President Bush and Sen. Kerry appear to be advocates of free trade, although it’s often hard to see this in their campaign pronouncements, which try to please voters on all sides of all issues. President Bush (like his chief economist, Greg Mankiw) has spoken in favor of free trade — although the Bush administration also imposed tariffs on steel imports to curry favor from voters in Ohio and West Virginia.
Sen. Kerry has a solid record in support of NAFTA and other international agreements that aim to reduce trade barriers — although in recent months he has often spoken of the need for “fairer trade” to placate some of his supporters. On the bottom line, it seems a safe bet that the next president, whether it’s Bush or Kerry, will generally continue this country’s support of free trade, with the broad economic growth it brings to the U.S. and our trading partners.
Dr. Wayne Carroll is a Department of Economics professor at the University of Wisconsin-Eau Claire.
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