Follow up on impact on outsourcing of Obama's tax plans
I started a discussion on LinkedIn on the potential impact of new legislation by the Obama Administration on the offshore outsource industry and I got some interesting feedback I also wanted to share here. You can read my original post on this topic here. This comment is from Guy Kirkwood and he mentioed among others the following:
"Protectionism is defended by two major arguments. The first is that protectionist policies save jobs in domestic industries. This argument reasons that if a domestic industry is forced to compete against a foreign country that provides services more cheaply, such as India, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be decimated by poverty.
The second argument, a corollary to this one, is that eventually, left to compete for too long against an offshore location, a domestic industry might collapse completely, leaving the protectionist-prone country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource. So the question, when times are is not, “Should we save these jobs?” It is, “Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?”
Domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers. If offshoring becomes “the” industry that the US seeks to repress, it’s my opinion that this protectionism will cost the US domestic economy much and achieve little."
There have been many scolars trying to quantify the effect of protectionism on a domestic economy and I do not want to go through all of them. There are however (at least) two interesting pieces of research which try to quantify the effects of offshoring on the economy.
One approach is described in an article from McKinsey (2003) in which they argued that the net benefit of offshoring for the ecomomy would be positive due to a combination of lower import prices and redundant worker taking another (lower paid) job. In this article they argue that of one dollar spend by a domestic company offshoring a value of $1.45 - $1.47 is created for the global economy as a whole. The U.S. would capture $1.12 - $1.14 while the receiving country captures on average 33 cents. In other words, the U.S. captures 78 percent of the total value.
The US Bureau of Ecomomic Analysis (BEA), part of the department of commerce came however with some different results. They argue that foreign providers of outsourcing services actually buy U.S. firms, hollow them out, and outsource production their home or other countries. These firms purchase the firms for the domestic market shares, extensive distribution systems, and widespread brand recognition. Result is increase in net imports by that firm and by the United States as a whole. This resulted accodingly to the BEA in a job loss of 4 million in the peiod of 1991 to 2005. As there were not 4 million new jobs created in other area's/companies to absorb the redundant employees is the nett benefit less beneficial for the US economy than predicted by the article of McKinsey.
Explanation of the data in the added picture (Source: Economic Policy Institute, Issue brief #236 August 23, 2007):
"Protectionism is defended by two major arguments. The first is that protectionist policies save jobs in domestic industries. This argument reasons that if a domestic industry is forced to compete against a foreign country that provides services more cheaply, such as India, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be decimated by poverty.
The second argument, a corollary to this one, is that eventually, left to compete for too long against an offshore location, a domestic industry might collapse completely, leaving the protectionist-prone country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource. So the question, when times are is not, “Should we save these jobs?” It is, “Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?”
Domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers. If offshoring becomes “the” industry that the US seeks to repress, it’s my opinion that this protectionism will cost the US domestic economy much and achieve little."
There have been many scolars trying to quantify the effect of protectionism on a domestic economy and I do not want to go through all of them. There are however (at least) two interesting pieces of research which try to quantify the effects of offshoring on the economy.
One approach is described in an article from McKinsey (2003) in which they argued that the net benefit of offshoring for the ecomomy would be positive due to a combination of lower import prices and redundant worker taking another (lower paid) job. In this article they argue that of one dollar spend by a domestic company offshoring a value of $1.45 - $1.47 is created for the global economy as a whole. The U.S. would capture $1.12 - $1.14 while the receiving country captures on average 33 cents. In other words, the U.S. captures 78 percent of the total value.
The US Bureau of Ecomomic Analysis (BEA), part of the department of commerce came however with some different results. They argue that foreign providers of outsourcing services actually buy U.S. firms, hollow them out, and outsource production their home or other countries. These firms purchase the firms for the domestic market shares, extensive distribution systems, and widespread brand recognition. Result is increase in net imports by that firm and by the United States as a whole. This resulted accodingly to the BEA in a job loss of 4 million in the peiod of 1991 to 2005. As there were not 4 million new jobs created in other area's/companies to absorb the redundant employees is the nett benefit less beneficial for the US economy than predicted by the article of McKinsey.
Explanation of the data in the added picture (Source: Economic Policy Institute, Issue brief #236 August 23, 2007): - Between 1991 and 2005, foreign multinational corporations (FMNCs) acquired 4.94 million workers plus 303k workers in foreign-owned startups. Thus, FMNCs added in theory 5.25 million workers.
- If not for layoffs total employment should have been 9.09 million jobs (3.84 million workers plus the 5.25 million hired or acquired by FMNCs)
- However, in 2005, FMNCs actually employed just 5.09 million workers, so 4 million jobs short.
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