The Governance of Outsourcing

In this presidential election year, job outsourcing has become a political wedge issue for both Democrats and Republicans.

In this presidential election year, job outsourcing has become a political wedge issue for both Democrats and Republicans. Demagoguery and passion have replaced analysis and reason. Proponents of outsourcing advocate that it is to America's advantage to avail itself of those services and products that can be acquired more cheaply overseas. Opponents of outsourcing argue that these bargain goods and services benefit only the highly skilled and highly paid Americans. Many Americans believe that outsourcing is a threat to their economic well-being.

America seems to be at cross-purposes. Notwithstanding that most southern textile manufacturers were once based in New England, southern conservative politicians who normally claim that the U.S. should compete with trade not tariffs, now argue for protectionism. This is tantamount to arguing in favor of national health care since protecting the medically uninsurable and protecting unprofitable jobs is comparable. At some level, protecting "buggy whip" jobs limits a prospective entrepreneur's opportunity to start a new venture. Likewise, champions of choice, advocate that America should never enter into a trade agreement that allows corporations to leave for another country in order to employ cheap child labor. This "economic morality" begets commercial censorship, a key operational component of class warfare.

There is little argument that global realities have altered the scale, scope, and span of modern commerce. Change is happening to a greater degree at a greater frequency. Whereas it took radio 38 years to reach critical mass of 50 million users, it took television merely twelve years, and e-commerce only four. This degree of change is frightening to some Americans, who are faced with the prospects of wage stagnation and the loss of health care. Yet would those same citizens trade their uncertainty for the predictability experienced in the former Soviet Union, which proved unable to address effectively the hierarchical complexity required by a global society?

To this point, we address the following questions concerning:

•       What is outsourcing?

•       What preconditions must be present for outsourcing to occur?

•       What can be done to ensure that outsourcing provides a net societal benefit?

The answers to these questions have profound implications for both America and our trading partners.

What is outsourcing?

The economic factors of production are land, labor, and capital. Outsourcing is the transfer of all or a portion the labor component of production to an external location.[1] The three types of outsourcing are: sovereign, surrogate, and structural.

Sovereign outsourcing occurs when production is transferred to another country.  Those who rail against outsourcing should consider that a significant number of American jobs rely on foreign firms "insourcing" jobs to the U.S. For example, Toyota Motor, the large Japanese automaker that currently sells more cars in the U.S. than any domestic automaker, has 35,000 U.S. employees and $14 billion invested. A cynic will argue that Toyota's investment in the U.S. is not altruism. Every MBA student knows manufacturing your product close to your customer base is a good business decision. Outsourcing occurs because it represents a sound business practice. If U.S. companies are prevented from outsourcing, then foreign companies who are able to insource will have a competitive advantage.  Toyota recognized that its investment in the U.S. insulated Toyota from Japanese protectionism.

A close parallel can be made between protectionism and those advocating an end to outsourcing. Both argue in favor of "buy American" - whether labor, or products.  While "buy American" sounds patriotic, the associated lack of competitiveness reduces quality.  Imagine the consequences if steel and automaker lobbyists had been successful in sponsoring protectionism. The $20,000 price of a Chevrolet Malibu[2] would be closer to the $320,000 of a Rolls Royce, and the 2003 North American automobile production of 16 million cars would be closer to the 200 cars produced by Rolls Royce for the American market.  Foreign competition forced U.S. automakers to increase the quality of their product (as demonstrated by fuel efficiency standards) while being price competitive, proving that the best strategy for protecting one's job is a superior product financed by ever-increasing amounts of per capita capital investment.