Outsourcing

Outsourcing in a Global Economy

Introduction

Outsourcing is a very controversial topic in today’s economy. This heated debate has many people, especially economists and politicians arguing weather outsourcing is a positive for advanced economies or if it negatively affects them. Economists like Samuelson and Fenoaltea are two economists who are on the adverse side of outsourcing and Blinder is on the pro side.

In the first section I will explain a brief background of what outsourcing is and some of the global issues that are affected by outsourcing. For instance, I will give examples of how it has helped and harmed the economy. In the second part of my paper I will discuss the viewpoints of key players in the debate of outsourcing. I will give Samuelson, Fenoaltea and Paul Craig Roberts’s opinions and theories against outsourcing. I will also show Blinder’s perspective and how it is just a step forward as the next industrial revolution. I will also point out businesses that benefit from outsourcing and give examples of companies who have succeeded and gained from this opportunity. I will then describe a theoretical debate between these opponents and proponents of outsourcing. It will also include some of my own opinions and thoughts about the issue.

Exploring Outsourcing

What exactly is outsourcing? Outsourcing is often used to describe cases in which corporations move part of their operations out of the home country. Companies subcontracting in the same country would be considered outsourcing, but not offshoring. Offshoring is a type of outsourcing that relocates the business processes to another country. This is usually done to reduce labor costs. It can include processes such as manufacturing, production or services. The difference between outsourcing and offshoring is that outsourcing can still be in the same country and offshoring happens when the process is moved to another country entirely.

Positive Aspects of Outsourcing

According to Krugman and Obstfeld outsourcing helps to increase the volume of international trade although it is highly controversial. Some of the benefits of outsourcing include: cost savings, improved quality, more knowledge and operational expertise, commodification and the ability to work twenty-four hours a day seven days a week. These are just a few of the benefits but depending what type of business is outsourcing they can benefit in a number of ways. Also, these benefits have positive effects on the increase in jobs in the country that the work is outsourced too and it lowers cost of goods and services in the origin country. Outsourcing promotes the economic theory of comparative advantage by allowing other countries to produce what they can make most efficiently.

Negative Aspects of Outsourcing

The negative side effects of outsourcing can include: job erosion and loss of wages in the origin country, displacement of these highly skilled workers, hidden costs and different business environments and cultural differences. There are many other criticisms of outsourcing such as; the strong public opinion against outsourcing for fear that it will damage the labor market in the origin country or the local market. In addition, the social responsibility and shareholders interests may not be taken into consideration. It is also damaging to customer service when it is difficult for customers to understand workers in the outsourced country. Because many U.S. companies actively outsource it is affecting some areas of America much more than others. When outsourcing happens it can cause the goods to become more expensive, this is bad for the consumer and bad for the producer. Eventually, the goods will be too expensive to buy and the producer will bear the losses which may have not occurred if they had not outsourced in the first place. Many times countries outsourcing can effect a countries terms of trade very badly. For example, if the price level difference continues to increase the backward country will experience a fall in wealth, because the good is price inelastic. Eventually, the backward country cannot pay for the price of manufacturing so they start outsourcing its population. Then countries that export software and manufacturing goods to these backward countries, were their terms of trade could go up, have already outsourced all their labor; thus, causing their terms of trade to decrease even more. This is one of Fenoaltea’s arguments against outsourcing. There are many ways to approach outsourcing and now I will explore different people’s views on outsourcing.

Opinions about Outsourcing

In the U.S. there has been so much debate against outsourcing and offshoring that politicians are passing bills against these practices. In 2004, The Defending American Jobs Act was passed that said “Under the proposed legislation, companies seeking government assistance would have to disclose their local and overseas workforce levels and would be ineligible for assistance if their policies favor overseas workers at the expense of U.S. workers.” (Don Ianonne) Congressman John Dingell of Michigan and Congresswoman Rosa DeLauro of Connecticut introduced the U.S. Workers Protection Act of 2005, “a bill that would prevent US taxpayer dollars from being used to outsource jobs to other countries. Specifically, the legislation focuses on prohibiting the government from outsourcing federal work, from buying of goods and services by federal agencies and state governments that use federal funds.”(Dingell) These two bills just show how vehemently some people are towards outsourcing.

Con Augments

There are many reasons that people are against outsourcing and offshoring. I will give some critical views of economist’s outlook on outsourcing. Paul Craig Roberts is an economist who served during the Regan Administration. Roberts stresses that a country cannot close its trade deficit if its economy is being moved offshore, as is the current situation in the U.S. Offshore production hits the trade deficit from both ends it causes products that were produced domestically to become imports and then exports declines. It switches the roles of production from items previously exported and turns them into exports. Robert says that economists who support offshoring are confusing comparative advantage and absolute advantage. Just because a country can produce the same product cheaper does not mean it has a comparative advantage. Offshoring or outsourcing is allowable only if the country has an absolute advantage, according to Roberts.

Arguments