Business & Finance Outsourcing

Does America Benefit from Offshoring?

You hear this question over and over again. It sounds simple, but it is much more difficult to answer than most people think. Outsourcing has been going on for a very long time, and is deeply embedded in most corporations. Offshoring is a newer form of outsourcing, but it's just an extension of the old outsourcing process, at least from the perspective of the outsourcer. Clearly, the firm that is doing the outsourcing, along with their vendor, hope to be the beneficiaries of outsourcing, but are they the only beneficiaries?

Does outsourcing and offshoring benefit America and its citizens?

Firms that decide to outsource rarely make this decision just cut workers. They do it to compete. Before there was offshoring, American companies outsourced domestically, so they outsourced to American companies. For example, a company would outsource its payroll services to an accounting firm. As payroll became more complex over the years (more types of deductions, tax issues, direct deposit, etc.) more firms made use of an outsourced service. Some firms outsourced a little bit of payroll, others outsourced it completely. They sent work to other firms because they could do the work better and more reliably, often for less. But this process built an industry of independent firms in America… everyone from ADP to the service firms like IBM that grew out of the accounting outsourcing industry. This is how America became the world’s largest service industry. It’s also how we spread US brands around the world and why foreign firms used US services to build and manage (outsource) the services that exist in many countries.

From before World War II until the 80's, America benefited enormously from other countries offshoring their work, even their sources of food, to the US. Of course, no tide will run in one direction forever. Eventually, all the projects that we built around the world stared to level the quality of goods around the world. That plus the movement towards reducing national tariffs and barriers to trade, and better technology and transportation, and suddenly information and products could be created in one part of the world and used or sold in another. Cheap products from other parts of the world began to arrive in the US and Europe. However, the early products were often missing something. They were not quite right. These cheap products were viewed as cheap products, not better value products, and weren’t purchased in great numbers. However, corporations such as Walmart, saw the potential and worked as a broker to get knowledgeable producers together with low cost manufacturers, eventually producing global products that were both good and inexpensive. Not on the first round, but eventually Chinese products became very hard to distinguish, except by their price tag, from other products.

Here we are, surrounded by cheap offshore products and their more expensive American made alternatives. At first manufacturers were reluctant to outsource because they didn't think that we, the American consumer, would buy offshored products just because they were cheaper. They were wrong. The American consumer, you and I and hundreds of millions of others, chose the best value. That made offshoring a real option for manufacturing and later for knowledge-based work.

This is the part of the outsourcing puzzle that most of us ignore. Obviously, personally benefit from outsourcing. The explosion in growth at Walmart, was at least partially due to its early mastery of offshore markets. Today, consumers rely heavily on Walmart and other “big box” stores for the goods we purchase. According to Economics Professor Jerry Hausman, we all benefit from the Walmart price… even if we don’t buy from Walmart… because other retailers must take the Walmart price into account when they sell their products.

On food products alone, buying at Walmart is the equivalent of getting a 6.5% increase in income if you are in the bottom 20% bracket of US home incomes. Of course, if you are in a higher-income bracket you have more to spend (and more to save) on plasma TVs, home appliances, and other goods sold at Walmart, Target, Best Buy and other firms that stock good that are mostly produced offshore.

There are other studies, such as one from McKinsey, that state that every $1 offshored benefits the US economy by $1.14. You can debate if this is right or wrong, if there are other factors to add or exclude, but clearly offshoring is not a one-way street. There are real benefits that just about every American receives. As one example, during the summer I looked at some specialty air conditioners. About 10 years ago I could choose between two models, one made in America and one from Italy, but costing about $1,500. This summer I was in a big-box store that had five air conditioners that were similar to the one I bought 10 years ago. They all more advanced features, remote controls, better energy efficiency, cost between $400 and $600, and were made offshore. We have lived with the Walmart price for so long that we forget how much we have each benefited from offshoring. If we didn’t have the Walmart price, what would it cost to maintain our homes and how much would the average American home need to give up?

In any economic analysis, it’s difficult to balance what you gain with what you lose, especially since the gainers and the losers may be different people. However, when we have debates about outsourcing, which is a popular discussion in a presidential election year, we forget that outsourced workers built the smart phones and big-screen TV's that we use to follow the debate about offshoring, and they built those devices because that’s what America demanded.

Just a the movement of electronics to offshore manufacturing was inevitable, so too is the next big thing in offshoring… offshoring BACK to America. Outsourcing is a very big process that takes decades for us to see all of the cycles it involves. Today discussions about outsourcing to China and India are big topics in the US elections. In a few years, outsourcing TO the US may be just as big an issue, in Chinese and Indian political debates!

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