What Politicians Don't Know About Outsourcing

By Steve Chapman
Thursday, July 19, 2012

It's a familiar story: A manufacturing company finds its wages too high, looks for ways to cut costs and ends up moving production overseas where the pastures are greener. It happened when some American jobs were outsourced to China. Now it's happening again -- with Chinese jobs fleeing to America.

This trend, known as "reshoring," has created some 10,000 positions in the United States in the past two years. It's driven partly -- believe it or not -- by the rising cost of Chinese labor. And it's only going to expand.

India has the same problem as China. Once the world capital of English-language call centers, it has been eclipsed by the Philippines -- where wages are slightly higher but locals speak an American style of English.

Outsourcing is a fact of life in the modern age, unless you live in North Korea, which is fortunate in having no private jobs to be moved. Relentless, unforgiving competition drives companies to locate where they have the best chance to survive and prosper.

Sensible leaders understand corporate mobility and make their peace with it. But in the U.S., each of the major party presidential candidates is pretending that outsourcing is a grotesque abuse that occurs only because of his opponent's heartless irresponsibility.

Barack Obama blames Mitt Romney because Bain Capital shipped jobs abroad -- a claim that FactCheck.org found baseless. Romney accuses Obama of sending stimulus funds to companies that produce overseas -- a charge dismissed by The Washington Post's Fact Checker.

That's one problem with the war of allegations. The other is that they reflect and promote an erroneous assumption: that outsourcing to other countries is something to be opposed at all costs. In fact, it's a vital part of international trade, which in turn is an immense boon to human progress.

Many Americans fear that every job moved beyond our borders constitutes a grievous loss to our economic welfare. But if something can be made cheaper elsewhere, the relocation will allow us to buy that product at a lower cost, which is entirely desirable. We don't improve our material well-being by depriving ourselves of the chance to get more goods for less money.

We don't actually lose jobs when a company decides to take its manufacturing elsewhere. A recent study of the U.S. published by the Centre for Economic Performance at the London School of Economics and Political Science found, "Offshoring has no effect on native employment in the aggregate." It destroys some jobs but creates just as many others.

Nor is it exactly optional. If clothing can be made far cheaper in China than in South Carolina, a company with plants in South Carolina can do one of two things. It can move its production to China to take advantage of the lower costs, or it can dig itself a grave and then climb in.

A company that successfully outsources saves jobs -- since a company that goes bust employs no one. If Bain had barred corporations from shifting factories when it made sense to do so, it would have been guilty of economic malfeasance.

Outsourcing, contrary to myth, has not led to the collapse of American manufacturing. In fact, U.S. industrial production has risen by nearly 50 percent in the past 15 years. The reason manufacturing employment has declined is that workers have gotten more productive -- meaning it takes less labor to make more goods.

But outsourcing is a two-way street. Nobody here seems to think the German government should stop Volkswagen from building cars in Tennessee. Some 700,000 Americans work for U.S. affiliates of Japanese companies, which apparently is cool with Japanese politicians.

Dartmouth economist Douglas Irwin points out that the U.S. has a trade deficit in goods but a trade surplus in services. Chinese companies, and U.S. companies that operate in China, often need the services of lawyers, architects and software engineers working on this side of the Pacific. In the end, both we and the Chinese gain from the process.

But it's the nature of our politics to ignore the vast benefits generated by international commerce and obsess about every negative consequence that can be found. Romney and Obama both manage to convey the impression that they have no clue how trade acts to continually raise our standard of living.

Luckily for us, they don't have to understand it. But it would help a lot if they would stay out of the way.