Primarily due to the “jobless recovery,” global outsourcing has become more controversial in the U.S. In an effort to gain an understanding of its impact, policymakers and others are raising a number of issues — many of which are discussed here.

Outsourcing Manufactured Goods

Traditional U.S. outsourcing mainly involved production sharing or co-production — a process whereby producers in at least two countries share in the manufacturing process. This has allowed U.S. companies to:

  • Complement their strengths with those of the outsourcing partner in order to create greater value;
  • Gain access to unique technology, raw materials and intermediate inputs;
  • Reduce overall costs; and
  • Retain higher wage jobs, product development, design, marketing-related activities, and capital-intensive manufacturing in the U.S.

This process is not unique to the United States. In fact, production sharing involves more than $800 billion or 30 percent of total manufacturing trade annually, according to the World Bank. Companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines. In the European Union (EU), most production sharing occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia. And a growing share of EU co-production is taking place in Northern Africa.

What If Co-production Were Discontinued?

In the late 1980s, the U.S. International Trade Commission (ITC) conducted a survey of 900 U.S. firms that utilized production sharing. When asked what they would do if their production sharing operations were terminated, their answers, ranked in order of frequency, were:

  1. Turn to foreign suppliers of components;
  2. Drop labor-intensive products and import them from East Asia;
  3. Move all manufacturing to Asia;
  4. Cut back U.S. production and target a market niche not threatened by imports; or
  5. Go out of business.

Since the 1980s, production sharing has become vastly more important to the U.S. And, according to the ITC, it has been responsible for generating new jobs and retaining jobs that would have been lost due to intense foreign competition.

Outsourcing of Labor Intensive Services

In recent years, labor intensive services have begun to be outsourced to India, the Philippines, Malaysia and other countries with large, well-educated, English-speaking labor pools. This has been made possible by new technologies that allow for the transfer of huge amounts of information around the world at minimal costs — coupled with the ability to digitize and computerize many services.

Since outsourcing of services is structurally simpler than manufacturing outsourcing in terms of resources, space and equipment requirements, outsourcing of services is anticipated to accelerate. But, how much? Forrester Research predicts 3.3 million U.S. service jobs will move offshore over the next 15 years. What does this mean for the U.S. economy and labor?

According to a recently published McKinsey Global Institute report, two-thirds of the economic benefits from outsourcing services to India flow back to the U.S. Plus, U.S. companies that outsource generate greater profits, become more globally competitive, and are better positioned to sell more goods and services worldwide. Furthermore, the report says that fear of massive job losses is unfounded since the vast majority of services cannot be outsourced and will remain in the U.S.

22 Million Net New Jobs by 2010

The loss of a job can have a tremendous impact on a worker and his or her family. But thanks to the U.S. economic ability to create jobs, there is a very good chance that a service worker who loses a job due to outsourcing will find another one within a reasonable period of time.

According to the McKinsey report, the United States has the highest rate of reemployment of any OECD country by a factor of nearly two times. Yet, the most compelling data on job creation may be based on past performance.

Although the United States incurred several periods of slow and negative economic growth from 1970 through 2000, the economy still produced 60 million jobs during this time — that’s an average of 20 million net new jobs each decade. And surprising to many, the job projection for this decade is even higher. According to the U.S. Bureau of Labor Statistics, the U.S. economy is predicted to create 22 million net new jobs by 2010.

Service-producing industries are expected to account for approximately 20 million of these new jobs, says the Bureau of Labor Statistics. Since the U.S. service sector has become extremely advanced and internationally competitive, its wages have risen considerably. In fact, average hourly earnings for service production workers have finally caught up to the manufacturing sector.

Service Exports To Rise

In 2002, U.S. service exports represented 30 percent of total exports, and they are rising. And it’s also increasingly likely that the telecommunications/digital infrastructure that is making the outsourcing of services possible is the same infrastructure that will significantly boost service exports. In fact, jobs gained from service exports are predicted by some to far exceed those lost due to outsourcing.

This article appeared in December 2003. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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