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Outsourcing

'The Rise of Outsourcing & It's Connection to Post-Industrial America'

From Steel Production to Hamburger Sales: the undeniable link between Outsourcing and Industrial Transition

Although the term “outsourcing” didn’t become relevant in the United States until the 1980’s, conceptually it plays a very important role in the immense industrialization that has occurred in the US in the last 100 years 1 . A Post-Industrial society is one that has transitioned from a manufacturing based economy to a service based economy. This transition implies a “restructuring of society as a whole 2 .”

According to University of Maryland’s George Ritzer, the transition from Industrial to Post-Industrial America hinges on the decline in manufacturing industries like clothing and steel production and the increase in services like selling hamburgers and offering advise on investments. This transition requires companies to move or contract some of their labor needs, like steel production, to other countries 2. Outsourcing occurs in post-industrial countries like the US when it becomes more profitable for companies to move or contract out some of their manufacturing or service operations to other countries 3.

The Development of Outsourcing

The end of World War II and the US transition to superpower status marks it’s shift from an industrial country to a post-industrial country. Before the war, America’s economy was almost completely self-sufficient, producing most of what it consumed. With its plentiful resources and diverse geography the US produced fruit, apparel, meat, machines, steel, along with automobiles. What couldn’t be produced on the home front was imported from foreign countries. Things like coffee, tea, spices, bananas, mineral ore, and diamonds were imported from abroad, but usually at great expense due to expensive transportation costs.

Outsourcing did not occur before World War II because international trade wasn’t as developed as it is today, due to increases in technology in the years after the war, that have greatly reduced the costs of transportation and communication.

After World War II, global trade greatly expanded—this was largely due to the United State’s aim to speed up the recovery of war-ravaged nations in Europe and Asia by importing their domestic goods. This was made possible with the federal government’s reduction in tariffs, which had greatly limited international trade in the past 3.

In the post-war era, the 1950s Presidential administrations of Harry S. Truman and Dwight D. Eisenhower worked hard to rebuild Japan’s economy, putting extra effort into the development of a textile industry. A trade relationship began to grow between the US and Japan, as Japan continued to rebuild, and the US began to import huge amounts of clothing from Japan along with neighboring countries that had built up their textile industry such as Taiwan, Hong Kong, South Korea, and the Philippines. With this, the seeds of outsourcing were planted 3.

This heavy import industry was not considered outsourcing because the US was purchasing entire goods produced overseas rather than moving their operations abroad. What became known as outsourcing occurred in the 1960s and 70s when American companies began contracting Asian producers to make clothing that had originally been made in the US. American companies outsourced apparel construction to Asia because labor costs were substantially lower (about 1/10th of US wages). Soon American companies caught on and in the 1960s and 70s they began to contract much of their domestic manufacturing to Asian countries 3.

1980s: The Rise of Global Outsourcing and Expanded International Trade

The term “Outsourcing” arose in the 1980s when US companies expanded their foreign operations from only Asia to Central America and South America. The 80s also saw the movement of European manufacturing abroad. Outsourcing and increased international trade was becoming the global dynamic 3.

The 80s mark a time of great technological improvement. The improvement in air transportation, more efficient overseas shipping, the reduced cost of international phone calls, the continued expansion of manufacturing abroad, combined with substantially lower wages all led to the increase in trade and the rise of outsourcing as we know it 3.

Benefits of Outsourcing

Although controversial, economists and other business experts agree that outsourcing isn’t only important to the expansion of trade and profit, it’s also beneficial for the world as a whole. By harnessing outsourcing, companies are able to lower the price of the good while increasing quality 1. Outsourcing benefits it’s respective economy as well as providing higher waged jobs and increased prestige in developing countries, such as India, China, and the Philippines. Standard of living is elevated in both countries as a product of outsourcing 5.

Negatives of Outsourcing

Although experts in the field of economics and public labor largely agree that outsourcing, as a form of trade, follow the principles of comparative advantage, which allows each country to benefit from it there are negatives that should be addressed 7. One complaint is quality; outsourced products are often thought to be of poorer materials and craftsmanship. But at much lower prices is the downgrade worth it? Ultimately it comes down to the buyer’s preferences.

As sited in Paul Krugman’s article in the New York Times “Feeling No Pain,” voiced, the rise of outsourcing and the spread of globalization have brought with them a new threat to worker security. Krugman writes that Outsourcing works against the very framework of Democracy, ”pitting one national workforce against another in an effort to lower firm costs and increase profits in the form of diminishing power an security of Labor as an influential pillar over the trajectory of societies or nations-states.”

Following President Clinton, a motivator of pro-trade policies, progressive economics, and a champion of the biggest free-trade agreement of our time (NAFTA) President George W. Bush has followed suit. Bush’s “economic growth” policies consist of a push for lower taxes, deregulation, few lawsuits, and an emphasis on energy policy 8.

A study by two University of California economists identifies 14 million American workers whose future employment may be at risk by the practice of outsourcing. Discovery Times 14

A Highly Controversial Transition

Outsourcing, especially in the US, is a very controversial subject because many domestic jobs are lost when companies move their factories to lower-wage countries overseas. Economists tend to disagree with the public, generally believing that it is beneficial for the United States and to other countries because it increases economic efficiency 3.

"Excessive Outsourcing" 4

New York Times columnist Frank Rich caused a brief firestorm when he wrote that competitive sourcing has resulted in “low-quality services at high cost: the creation of a shadow government of private companies rife with both incompetence and corruption 16.”

Outsourcing on the Political Scene

The 2004 elections saw the rise of outsourcing in political agenda and debate. These debates were based around dominant public fear that outsourcing would leave many Americans jobless. A poll by Zogby International of 1,000 Americans found that 71% believed that outsourcing jobs hurt the economy, 62% found that the US government “should impose legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource 6.”

Many American people felt betrayed by President Clinton’s North American Free Trade Agreement (NAFTA); an agreement that eliminated many North American trade barriers (in the form of tariffs, taxes, and other restrictions) and made outsourcing for cheaper labor in Mexico much easier. As in the past, Americans believed that NAFTA and its effects would lead to an increase in unemployment in the US. NAFTA along with other trade liberalizing movements led to the creation and expansion of the Trade Adjustment Assistance Act, which was designed as an attempt to re-train and locate displaced workers affected by outsourcing. It has proved largely unsuccessful, as only about a quarter of applicable people participate 7.

Vietnamese workers earn a living by making Nike shoes: This is not the outsourcing that Americans are most concerned about 13.

The Nature of Outsourcing

As with most economic concepts, outsourcing can be viewed from many angles. The most common way to consider outsourcing from a global perspective is it’s dynamic relationship with international trade. Globally, outsourcing is not considered a loss of jobs, rather a relocation of jobs from one country to another. When faced with the actual numbers, unemployment has not increased in the US during as outsourcing has increased. Along with outsourcing, must come “insourcing”. According to economic analysis more goods are outsourced to the US than the US outsources to other countries 7. Indeed, “while the US is exporting some jobs to other countries, the greatest beneficiary of outsourcing is the U.S. itself 9.”

The majority of Economists agree that most increases in economic efficiency incur the loss of jobs. Economist Thomas Sowell noted, “the automobile cost the jobs of people who took car of horses or made saddles, carriages, and horseshoes 10.”

A New Wave of Outsourcing: A Structural Change in the American Economy?

US Labor Force: Moving From Producing Goods to Services 13

In recent times, not only are manufacturing jobs being sent overseas, but also technology and service jobs. As mentioned above, there is a vast spectrum of responses to outsourcing, positives along with negatives. Technology and service jobs are mainly going to countries in India and Eastern Europe, qualified and desperately in need of the work. One thing is certain, as outsourced jobs are moving from the strictly blue-collar sector to the much more vocal white-collar class outsourcing is becoming a much more volatile issue and has moved to the forefront of political deliberation 11.

Yesterday’s assembly line textile jobs are tomorrow’s programmers, engineers, and office workers. A more educated and elite group, these white-collar workers have much greater political clout. As we saw in the 2004 elections, outsourcing has become a hot topic, one that economists say could be misused in close elections, Economic Researchers of a Yale Publication on Outsourcing fear that “unless a remedy especially sensitive to those displaced by the globalization of labor can be found, politicians may imprudently erect protectionist walls as an election year quick-fix 13.”

Tech workers in California protest job losses due to outsourcing: Signs of a structural change in the American economy? 13

The debate is heated and best described by two polarly charged quotes in The Economist and the Economic Policy Institute Snapshot:

“The great hollowing-out myth,” The Economist, In Favor of Outsourcing; February 19, 2004;

“The fact that foreign competition now impinges on services as well as manufacturing raises no new issues of principle whatever. If a car can be made more cheaply in Mexico, it should be. If a telephone enquiry can be processed more cheaply in India, it should be. All such transactions raise real incomes on both sides, as resources are advantageously redeployed, with added investment and growth in the exporting country and lower prices in the importing country. Yes, trade is a positive sum gain 11.”

“Insourcing’ myths: Jobs and insourcing,” Economic Policy Institute Snapshot; April 6, 2004;

“Some have suggested that the jobs lost to outsourcing are offset by the millions of American workers hired by foreign companies to produce new goods and services. However the vast majority of employment associated with new investments by foreign companies has taken the form of acquisitions of ongoing US. Companies, such as Daimler’s takeover of Chrysler. As a result of insourcing, 2.78 million US jobs were lost in foreign-owned firms between 1991 and 2001 11.”

Yale Global, a Yale University study on Globalization, specifically outsourcing, narrates the rapid outsourcing of service industries abroad. Today, businesses are looking overseas for cheap and skilled providers of customer service, information processing, and even for things like medical diagnosis and actuarial services. One report approximates that two million jobs in finance will be moved to India by 2008 12.

Yale Global forecasts that unlike the slow move of manufacturing jobs abroad, service jobs don’t depend on the long process of factory building, and will therefore make a faster leap overseas. Economists, and researches on the future of Outsourcing Dossani and Kenney agree that the US “needs to move workers up its economic ladder, by training them to work on creative tasks like design and marketing 12.”

An American Call Center in India. Yale Global says, “while American companies are saving a lot of money, their employees are looking at pink slips 12.”

Like other economists, YaleGlobal’s researching team is not sure how the movement of service industries abroad will effect the United States; no one at this moment is sure of the dimensions of this transfer process, though the numbers could be very large 12.” YaleGlobal is certain of one thing, “the old image of the developed nations concentrating on information services, data processing, and knowledge creation will give way to a world in which knowledge creation will become the critical factor - data and information will simply be commodities processed in Third World factories 12.”

India’s Dominance of American Outsourcing

Today, India is most greatly benefited from American outsourcing, gaining $9.5 billion in yearly services to American companies. Surprisingly, Ireland is next at $6 billion, followed by Israel at $2.6 billion, the Philippines at $1 billion, and Russia at $800 million.

Significant Dates in the History of Outsourcing

1776: Adam Smith, in the 'The Wealth of Nations', formulates a theory of competitive advantage, extracting the notion of outsourcing as a way to cut costs by hiring cheaper labor in less developed countries 14.

1970: fiber-optic telecommunication cable was developed which allowed for the transmission of large amounts of information over long distances 14.

1980s: a network of fiber-optic lines was created across the Atlantic and Pacific connected the US with the rest of the world 14.

1980s: Outsourcing enters the business lexicon 15.

1990s: the combining of regional computer networks into a worldwide Internet allowed people from all reaches of the globe to be connected to one another. Increased computing power, data storage, and software capabilities made it possible to manage their labor 14.

1998: Outsourcing is a $100 billion per year industry 15.

2003: Outsourcing accumulates $298.5 billion in global revenues 15.

2004: Outsourcing is one of the topics of debate between the candidates in the United States presidential election 15.

The development of fiberoptic telecommunication cable greatly influenced the growth of outsourcing 14

Conclusions

Advocates of outsourcing say this aids US companies remain competitive in the global marketplace, holds down consumer prices, which preserves jobs by keeping companies thriving. Those opposed say that outsourcing threatens the stability of certain professions by allowing foreign competition. They also fear that relying on and building up technical talent abroad might undermine America’s own R&D abilities 14.

Outsourcing has played a crucial role in the development of a post-industrial America, by relocating manufacturing starting in the 50s, and service industries today, outsourcing has acted as an undeniable current of economic change in the United States, as well as globally.

SOURCES

Work Sited

1 http://en.wikipedia.org/wiki/Outsourcing Outsourcing

2 Ritzer, George. The Coming of Post-Industrial Society. Second Edition. New York: McGraw-Hill, 2007

3 http://encarta.msn.com/encyclopedia_701702628/Outsourcing.html Outsourcing

4 http://blog.rootshell.be/2006/01/ Grand Avenue: Outsourcing

5 The Choice: A Fable of Free Trade and Protectionism (3rd edition)

6 http://www.napawash.org/ NAPA 2006: 38

7 Professor Marc Lieberman, International Economics, Spring 2007

8 http://economistsview.typepad.com/economistsview/2006/03/paul_krugman_fe.html No Pain, No Gain, Krugman, Paul

9 Walter Wriston, economist. Wall Street Journal. March 24, 2004

10 http://capmag.com/article.asp?ID=3565 “Outsourcing” and “Saving Jobs” by Thomas Sowell

11 http://www.pbs.org/now/politics/outsourcedebate.html Politics and Economy: America and Jobs; The Outsourcing Debate

12 http://yaleglobal.yale.edu/display.article?id=3406 Yale Global Online: Outsourcing Debate, Part I

13 http://yaleglobal.yale.edu/display.article?id=3422 Yale Global Online: Outsourcing Debate, Part II

14 http://times.discovery.com/convergence/outsource/slideshow/slideshow.html Discovery Times: Outsourcing

15 http://www.itweb.co.za/sections/features/outsourcing/feature0703120705.asp Outsourcing Timelines

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