Fair exchange: who benefits from outsourcing?

Christian Century, Sept 21, 2004 by Albino Barrera

THE OUTSOURCING OF U.S. jobs overseas, the subject of much discussion in this year's presidential campaign, is part of an economic movement that promises a better life--indeed, a new beginning--for many people in developing countries. It gives technologically savvy young people in countries like India livelihoods that move them into the ranks of the middle class. On the other hand, workers in industrialized nations are being displaced in large numbers. Comparably well-paying jobs are not being created fast enough to make up for the positions headed offshore.

How does one morally evaluate this complex situation? Since international trade by its nature entails shifting resources for comparative advantage, the phenomenon of international outsourcing is not really new. The U.S. imports goods that would have cost more to produce domestically, and it manufactures and sells to other countries commodities that would have been more expensive for them to supply themselves. It is a win-win situation for nations, providing gains in consumption, production and exchange.

Cheaper imports mean that incomes can be stretched to buy more goods and services. Trade increases real income because it improves people's purchasing power. It also brings gains in production, since it allows countries to manufacture only those commodities that provide them the best possible earnings.

It makes sense for the U.S. to use its scarce natural and human resources to manufacture airplanes, high-end computer chips and advanced software--products that command better prices than do less complex things like shoes or textiles. Why produce something ourselves that we can get more cheaply elsewhere? Why use our resources to manufacture something of lesser value when we could use them to make something of greater value?

The world reaps enormous benefits from letting countries specialize in what they do best and most cheaply. Not only does this system increase efficiency and achieve economies of scale (both of which lead to a drop in costs), but it lays the groundwork for even more pathbreaking technological changes in processes and products.

Economic history makes clear that openness to the global marketplace is a significant determiner of a nation's economic well-being. Thus, the promotion of trade liberalization has been a perennial part of the World Bank's and the International Monetary Fund's assistance packages.

Yet assertions about the advantages of international trade (and, by extension, international outsourcing) must be heavily qualified. They refer only to overall gains and do not acknowledge how benefits are disbursed. One error in economic reasoning is the fallacy of division: the assumption that what is good for the whole is necessarily good for its individual parts. Not everybody gains from trade. The benefits of international trade come at the price of creating an economic life in constant flux and even disequilibrium.

Concern over the deleterious impact of trade (or technological change) is also not new. Tensions arising from market innovations and expansion began with the onset of the Industrial Revolution. British master weavers' hard-won and highly paid skills were rendered obsolete overnight by the introduction of machinery that quickly and abundantly produced textiles of comparable and uniform quality. Some of these disaffected weavers (eventually known as the Luddites) rioted, destroyed textile machinery and heavily lobbied parliament to ban or regulate the use of labor-displacing equipment (all to no avail).

Earlier, through contentious, drawn-out debates, "free-traders" succeeded in convincing the British parliament to repeal the Corn Laws and allow the unrestricted entry of cheaper grains from abroad. Industrialists asserted that this approach kept food prices (and wages) low, thereby making British industrial products more competitive abroad. Urban workers and industrialists benefited from the liberalization of the food market, but at the expense of farmers and landowners.

Technological change and market expansion can precipitate radical overnight changes in income distribution. They can produce a profound reallocation of burdens and benefits across local communities and even nations. No wonder international trade has always been a contentious issue.

Outsourcing has gained notoriety in recent months because of toe accelerating volume of job transfers overseas and the sudden vulnerability of high-tech and service occupations that were once thought immune to trade displacement. Services that used to be nontradable (back-office operations, call centers, data management and accounting sectors) have now been made fully tradable because of advances in communications and computational technologies. Location is increasingly insignificant in the provision of these services. Moreover, the ready availability of large pools of technically capable and computer-savvy workers overseas has eroded what traditionally had been considered the distinct preserve of the U.S. and other developed countries: sophisticated, high-end technologies.