Outsourcing...

Up for debate, what would be valid solutions to the outsourcing problem we are currently experiencing. The commonly suggested solution is a protective tariff on goods coming from foreign countries and/or cheap laborers. Although this solution seems logical at first, it seems like it would hamper internal competition in our country, becuase the "protected" companies would have no incentive to improve the quality or price of their goods.

Please excuse any spelling errors (if there are any), I am 15 years old and am just researching this topic in order to assist with an independant research paper.

Thanks
Kris

What 'outsourcing' problem? What makes you think that outsourcing is a problem?

x synix said:

Up for debate, what would be valid solutions to the outsourcing problem we are currently experiencing. The commonly suggested solution is a protective tariff on goods coming from foreign countries and/or cheap laborers. Although this solution seems logical at first, it seems like it would hamper internal competition in our country, becuase the "protected" companies would have no incentive to improve the quality or price of their goods.

Please excuse any spelling errors (if there are any), I am 15 years old and am just researching this topic in order to assist with an independant research paper.

Thanks
Kris

Click to expand...

If a private company decides to outsource, it is in their right to do so. I think we need to work out deals with foreign countries to lower trade barriers. We should do away with the trade barriers on both sides and let the market work itself out.

TimmyBoy said:

If a private company decides to outsource, it is in their right to do so. I think we need to work out deals with foreign countries to lower trade barriers. We should do away with the trade barriers on both sides and let the market work itself out.

Click to expand...

well as our corporations are becoming more global.... do you think that people in the US losing jobs to people in India and China is necessarily a good thing?

do you think that people in the US losing jobs to people in India and China is necessarily a good thing?

Click to expand...

In the aggregate and in the longer run, yes. Now, that is not as cruel as it may sound. Yes, losing jobs is difficult. If you lose your job, your unemployment rate is 100%, not the 5.2% reported by the stats.

But, tasks of any kind will always migrate to the lowest cost producer. When the lowest cost producer is in another country, tasks will migrate there. Its simply an economic fact of life. Ricardo's theory of comparative advantage is often cited as an underlying proof (though some dispute the accuracy of the association).

We saw (and continue to see on a smaller scale) the same phenom when mfg jobs were migrating from the unionized high-wage areas of the northeastern and midwestern US to the less unionized, lower-wage areas of the southern US.

Impossible to do the topic justice on a forum like this, but to put it as simply as possible, the opening of labor markets around the globe increases aggregate economic activity and opportunities for all, like a rising tide lifts all boats. Those specific workers in higher wage areas whose jobs are displaced in the process need and deserve social policies that will assist them with retraining and other means of rejoining the workfore.

x synix, excellent questions. Oldreliable67 has given an excellent post. I'll give a quick analogy of the way I see the world wide market working and the reason outsourcing is a good thing. Let an ant colony represent the world wide labor market and the mound they are building the goods and services created. If the talents of the ants were organized the most efficiently, the mound could be much larger and built quicker. For instance, maybe it takes ten normal ants to carry a particularly dense clump of sand to the mound. The mother ant that organizes the labor within the colony decides it would be more efficient to go get Arnold, the ant with six pack, who guards the food trail, to switch jobs and go carry the large clump of sand, and she replaces him with five of the ants that were carrying the large clump of sand to stand guard. This frees up the other five ants to go out and get an additional clump of sand for the mound. This is sort of how the market works. As an example, the U.S. can produce grain much cheaper than Japan because of the abundant land. Japanese grain farmers may complain about outsourcing their jobs away to America, but if the Japanese government decides to protect their jobs by high tarrifs, the net effect is that while a few prosper because of this, the majority are hurt as American farmers do not sell as much grain, the Japanese consumers must pay higher prices for bread, and the extra money that the consumer would have in their pockets from the savings on bread could be used to buy another good or service, which would have benefited workers in another industry.

x synix said:

Up for debate, what would be valid solutions to the outsourcing problem we are currently experiencing. The commonly suggested solution is a protective tariff on goods coming from foreign countries and/or cheap laborers. Although this solution seems logical at first, it seems like it would hamper internal competition in our country, becuase the "protected" companies would have no incentive to improve the quality or price of their goods.

Please excuse any spelling errors (if there are any), I am 15 years old and am just researching this topic in order to assist with an independant research paper.

Thanks
Kris

Click to expand...

I have to agree with the other people who have said that outsourcing isn't a problem, and therefore needs no solutions. If anything, we should be encouraging outsourcing.

Think of it this way: Say that Acme Widgets, Inc. has $25 million to spend on labor. They can either hire a thousand American widget-makers for a year, or they can hire five thousand Indian widget-makers for a year. Obviously, they're going to want to outsource the jobs to India. This means that they can make a lot more widgets, and therefore have a higher profit margin. This higher profit margin is passed on to their stockholders in the form of dividends, and to their consumers in the form of lower prices. In the long run, this will give Acme Widgets, Inc. more money to spend, and they will likely hire American workers to fill some other job.

nkgupta80 said:

well as our corporations are becoming more global.... do you think that people in the US losing jobs to people in India and China is necessarily a good thing?

Click to expand...

It's not necessarily a good thing, but it is best thing for the long term economy.

Well, in response to "outsourcing isnt necessarily a bad thing", it depends what angle you are coming at it from. Yes, it is good for the world economy, becuase it gives jobs and American dollars to "less fortunate" countries. The use of the money the American people lose is not as significant as the use that it would partake in countries where jobs are being outsourced. I can guarantee you very few Americans, even those whos jobs have been lost to outsourcing, are starving, while the small wages that are paid to the foreign workers often means the difference between life and death for them. In spite of this, isn't the US "The World's Marketplace"? In the long run, outsourcing takes money away from the people that buy most of the worlds products, and spreads it thinly accross the globe. I reccomend looking up the Tariffs imposed during the 1816-1828 period. Supported by John C. Calhoun at first, and soon revoked because of internal protests. History repeats itself:lol: , maybe protective tariffs put us in to much of a shell?

And also;
"In the long run, this will give Acme Widgets, Inc. more money to spend, and they will likely hire American workers to fill some other job."

Just because you have more money doesn't mean that you are going to spend it stupidly and hire more expensive americans over foreign workers just to be nice...just because you have excess money as far as expenses doesnt mean you have to much as a person/corporation:lol:

Lets clarify a couple of terms that we shouldn't but often do use somewhat synonomously. 'outsourcing' means taking some specific but limited activity that a company is doing domestically, in-house, and having another company perform that exact same function for you and then reintegrating their work back into your overall operation. Some kinds of research, call centers, or accounts receivable are often cited as examples of outsourcing.

'Offshoring' is when a company takes one of its factories that is operating in Canton, Ohio and moves the whole factory to Canton, China. There, it produces the very same product in the very same way, only with cheaper labor, lower taxes, subsidized energy and lower health care costs.

Since China is the current offshoring favorite, lets hit a couple of high points about that. By joining the World Trade Organization (WTO) in 2001, China assured foreign companies that if they shifted factories offshore to China, they would be protected by international law and standard business practices. Offshoring to China had been accelerating since the mid-1990s, but this greatly enhanced China's attractiveness as a manufacturing platform. It has been said that 2 million copies of the Chinese language edition of the WTO rule book were sold in the weeks just after China signed on to the WTO.

Fortune magazine (October 4, 2004) quoted a study by Morgan Stanley estimating that since the mid-1990s alone, cheap imports from China have saved US consumers roughly $600 billion and have saved US manufacturers untold billions in cheaper parts for their products. This savings, in turn, Fortune noted, helped the Fed to hold down interest rates longer, giving more Americans a chance to buy homes or refinance the ones they have, and giving businesses more capital to invest in new innovations.

In another post above, I mention David Ricardo, the classical economist who developed the free-trade theory of comparative advantage, which stipulates that if each nation specializes in the production of goods in which it has a comparative cost advantage and then trades with other nations for the goods in which they specialize, there will be an overall gain in trade, and overall income levels should rise in each trading country. There is still some debate among economists as whether Ricardo was right.

Marc Andreesen, the creator of the Mosaic browser and co-founder of Netscape, said,

"The pie keeps growing because things that look like wants today are needs tomorrow...If you believe human wants and needs are infinite, then there are infinite industries to be created, infinite businesses to be started, and infinite jobs to be done, and the only limiting factor is human imagination...If you look over the sweep of history, every time we had more trade, more communications, we had a big upswing in economic activity and standard of living."

Main source: "The World is Flat" by Thomas Friedman

x synix said:

In spite of this, isn't the US "The World's Marketplace"? In the long run, outsourcing takes money away from the people that buy most of the worlds products, and spreads it thinly accross the globe.

Click to expand...

Quite the opposite, actually. Outsourcing lowers the production costs for companies, and these savings are passed on to consumers in the form of lower prices. The consumers get their products for less money, and have extra money to spend on other products or investments.

The only way that you could say that it "takes money away from (Americans)" is by the fact that some Americans will lose their jobs to outsourcing. But this assumes that no new jobs are being created, which clearly isn't the case. America has been outsourcing jobs for centuries, yet our unemployment rate is very low by world standards.

x synix said:

Just because you have more money doesn't mean that you are going to spend it stupidly and hire more expensive americans over foreign workers just to be nice...just because you have excess money as far as expenses doesnt mean you have to much as a person/corporation:lol:

Click to expand...

You misunderstand my point. It has nothing to do with using that extra money to "be nice." But the extra money might enable the company to create new jobs that Americans are better suited for than foreigners.

Kandahar: exactly.

A study by Harvard economist Richard Freeman in 2004 concluded that in 1985, 'the global economic world' comprised North America, Western Europe,, Japan, and chunks of Latin America, Africa, and the countries of East Asia.. The total population of this global economic world, taking part in international trade and commerce, said Freeman, was about 2.5 billion people.

By 2000, as a result of the collapse of communism in the Soviet Union, India's turn from autarky, China's shift to market capitalism, and population growth all over, the global economic world expanded to encompass 6 billion people.

Of these 6 billion, roughly 1.5 billion new workers entered the global economic labor force, Freeman said, which is almost exactly double the number we would have had in 2000 had China, India and the Soviet Union not joined.

These people are not only members of the labor force, they are also consumers, consumers with the same 'scarce resources, unlimited wants' of all consumers around the globe. So while some jobs may be lost in the offshoring of manufacturing from one region to another, the vast new base of consumers offers huge new markets for other companies to service.

As has been mentioned, the hard part is providing the safety net of re-training and education that will assist those displaced by the process in finding a replacement. That process of finding something new is made easier by the sheer size of the newly opened markets.

Kandahar and Oldreliable67, you two really need to be guests on Lou Dobbs.

Or maybe Lou Dobbs needs to be a guest on the OR67 & Kandahar show...

oldreliable67 said:

Or maybe Lou Dobbs needs to be a guest on the OR67 & Kandahar show...

Click to expand...

that would be the freak show right

I will make some comments on the posts by the free traders, and then a couple statements regarding protectionism in general.

In another post above, I mention David Ricardo, the classical economist who developed the free-trade theory of comparative advantage, which stipulates that if each nation specializes in the production of goods in which it has a comparative cost advantage and then trades with other nations for the goods in which they specialize, there will be an overall gain in trade, and overall income levels should rise in each trading country. There is still some debate among economists as whether Ricardo was right.

Click to expand...

While there might be some minor critcisms of Ricardo's law, I think you are overstating their significance by even mentioning a "debate among economists". The Ricardian law of comparative cost is merely a relatively trivial application of the much larger law of association to international trade. The concept that A can still benefit more by undertaking the production process which he is best at and leaving the other to B, even if he's more productive than B in both lines of production, justifies the entire division of labor organization which is the foundation of modern catallactics. No, there isn't much debate there because without the law of association (and it's derivative, the law of comparative cost) there would be very little room for economic theory.

Also, I would add that Ricardo's law only applies to areas where labor and capital factors are relatively immobile. To the extent they are not, productive resources will be distributed across the globe in the most favorable areas for human effort. Otherwise the law of comparative cost kicks in.

One more comment directed at the free traders: at present, economic globalization is extremely limited in scope. When we look at Third World countries, only China and India are really reaping the benefits. The rest of the developing world continues to dwell in autarky and isolation. Latin America, Africa, and most parts of Asia except for certain strips of land in India and China (remember, a lot of the regions in those two countries are just as backwards as the rest of the Third World) remain disconnected from the global economy.

The vast majority of trade and investment flows (also indicators of "outsourcing") occurs between the rich countries. This continues to be true even during the era of China and India. Protectionists in both the developed and developing worlds are to blame for this chronic problem.

And I'll also have a few words about free trade in general. Third World workers enjoy their competitive advantage as compared to First World workers because of cheap labor costs. Wages are low in these countries because of low productivity due to a lack of capital. Take away these low wages and the workers - who willingly signed up for these jobs because most of the domestic alternatives are far worse - will lose their comparative advantage, and the consumers who benefit from cheaper prices will lose with them.

Remember that in any economy, there are always wants which remained unsatisfied. The law of comparative cost will shift a nation's workers from those which he is less value-productive to those which he is more value-productive.

Outsourcing is not always the best business move. Higher transportation costs and shoddy infrastructure in developing countries can often offset the advantages of cheap labor. Some companies have discovered this and are changing tack. But this is for firms to discover on their own - not for politicians to decide in advance.

Finally, I must note the limitations of economics. While there is no economic argument against free trade, that does not mean the debate stops there. For the nationalist - Lou Dobbs for example - who believes that Americans "deserve" the jobs more than the Indians or Chinese, due to some twisted sense of patriotism (which is peculiar in ignoring the welfare of consumers), the economist can have nothing to say to him. At that point I withdraw from the debate

These are very general comments regarding free trade and much more can be said, but I prefer to wait until the protectionists barrage this thread with their fallacies.

Ether,

Excellent post! Very thoughtful.

While there might be some minor critcisms of Ricardo's law, I think you are overstating their significance by even mentioning a "debate among economists".

Click to expand...

See, like I said, there is some debate about whether Ricardo was right or not!
Actually, you are entirely correct about Ricardo and the "law of association". You have taken the thread to a deeper level than seemed appropriate when I put up the post to which you are referring.

Outsourcing is not always the best business move. Higher transportation costs and shoddy infrastructure in developing countries can often offset the advantages of cheap labor. Some companies have discovered this and are changing tack. But this is for firms to discover on their own - not for politicians to decide in advance.

Click to expand...

Quite true. But transportation systems appear to continue to continue to respond to demand with continuing innovation (more containers on seemingly ever larger container ships, more air cargo, etc).

Infrastructure continues to be a relatively larger problem in most countries. India, for example, has been restricted to more outsourcing of services than offshoring of mfg due to the lack of reliable electricity, dearth of airports capable of handling extensive air cargo, etc. China has been somewhat less affected in that development along the coast has proceeded apace, even though lagging inland.

In general (and this is fraught with all the hazards of any generalization), as offshoring and outsourcing continues to boost economies, infrastructure development will proceed and even accelerate in the regions affected.

And we haven't even discussed the political risk yet. Taiwan vs China? India vs Pakistan? Do what extent do companies take the political risk into account when making offshoring or outsourcing decisions? A lot? A little? Or, most likely, somewhere in between.

And laws? The laws surrounding commercial transactions in the event of bankruptcy or dispute are far from uniform around the globe, representing another major consideration for those wishing to offshore or outsource.

Nobody said it would be easy...

oldreliable67 said:

Quite true. But transportation systems appear to continue to continue to respond to demand with continuing innovation (more containers on seemingly ever larger container ships, more air cargo, etc).

Infrastructure continues to be a relatively larger problem in most countries. India, for example, has been restricted to more outsourcing of services than offshoring of mfg due to the lack of reliable electricity, dearth of airports capable of handling extensive air cargo, etc. China has been somewhat less affected in that development along the coast has proceeded apace, even though lagging inland.

In general (and this is fraught with all the hazards of any generalization), as offshoring and outsourcing continues to boost economies, infrastructure development will proceed and even accelerate in the regions affected.

And we haven't even discussed the political risk yet. Taiwan vs China? India vs Pakistan? Do what extent do companies take the political risk into account when making offshoring or outsourcing decisions? A lot? A little? Or, most likely, somewhere in between.

And laws? The laws surrounding commercial transactions in the event of bankruptcy or dispute are far from uniform around the globe, representing another major consideration for those wishing to offshore or outsource.

Nobody said it would be easy...

Click to expand...

You are probably more aware of the specific situations in each country than I am. I was just noting that the deficiencies in security, infrastructure, transportation, and the rule of law in Third World countries may often cancel out the benefits of cheap labor and thus make outsourcing unprofitable. As I said earlier, this is for each individual firm to discover, not for politicians to dictate in advance.

It is important for the Third World that we allow this practice to continue. People point to the low wages in these countries as if the multinationals are to blame for them. Only through increased capital investment and higher productivity can these workers be brought out of poverty. Foreign firms can help speed up this process.

I don't have anything more to say, it seems like we're on the same side