After the Election: The Future of Outsourcing

The two major presidential candidates are blaming each other for the outsourcing they say has moved American jobs abroad. Who is responsible?

Outsourcing has become a major issue in the current presidential campaign. President Barack Obama is blaming GOP candidate Mitt Romney for shipping jobs overseas as head of Bain Capital. Romney calls Obama the "outsourcer in chief," saying he has sent billions of dollars in stimulus funds to companies that manufacture abroad.

But the fact is, neither Washington policymakers nor corporate CEOs are responsible for the growth of outsourcing. The practice has mushroomed over the past 40 years for a variety of reasons, including the worldwide liberalization of trade and investment barriers, improved technology in manufacturing and finance, the appearance of cargo containers and overnight airfreight, and more skilled workers in developing countries.

Moreover, there's no way of telling how much outsourcing has occurred over the years or what impact it has had on the number of jobs in the U.S. economy. There are some indications that the overall damage has been modest. Many job losses in U.S. manufacturing, for example, have arisen not from outsourcing, but from the rise of robotics and improved technology here.

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The truth is, outsourcing will continue no matter who wins the presidency in November. Barring a landslide, which isn't in the cards, the new president is unlikely to have the majority in Congress he'd need to halt -- or even slow -- the practice. Even if the president were able to act, doing so might end up making U.S. companies less competitive worldwide.

There's only so much that Washington can do. One step would be to cut the U.S. corporate income tax. America's corporate tax averages 35%, compared with an average of 25% for the 33 other countries in the Organization for Economic Cooperation and Development.

Another possibility would be to revise the tax code to exempt U.S.-based multinationals from paying U.S. taxes on income they bring home from overseas. Under current law, American firms may defer payment of U.S. taxes by keeping their foreign-made profits abroad, but they must pay taxes here at home when they move the income back into the U.S.

Both proposals involving tax changes would increase the incentives for large corporations to keep production -- and presumably jobs -- at home.

Odds are at least even that lawmakers will move in this direction, reducing corporate taxes in some way within the next few years. But that wouldn't halt outsourcing entirely. For any given company, multiple factors are involved, and the choices are complex.

It's more likely that the same sorts of socioeconomic forces that prompted the wave of outsourcing will, in time, cause it to ebb. Indeed, the tide may have already peaked.

Wages in China are rising rapidly; quality control there is still uneven; technology secrets aren't secure; and the country may soon be facing a labor shortage -- and more social tensions. All make China less attractive for outsourcing. At the same time, wages in the U.S. have been flat for years; workers have become more flexible; unions have lost much of their clout; and the dollar has declined, making exporting from the U.S. more competitive. More-sophisticated robotics and other new technology also make it easier for U.S. producers to stay home.

U.S. companies were jolted by the disruption of the global supply chain in 2011. After the Japanese earthquake and tsunami and the resulting nuclear-power-plant shutdown deprived many firms of critical supplies, many U.S. executives wondered whether they were relying too much on overseas suppliers and just-in-time delivery.

At the same time, what is being outsourced is changing. China is moving up the value chain and will produce more-complex goods. Many U.S. manufacturing companies have already outsourced almost everything they can. Increasingly, services -- medical care, legal affairs and finance -- are being provided from abroad.

No one expects to see a deluge of previously outsourced production returning to the U.S.: Lower-wage countries such as Vietnam, Laos and Cambodia will get much of the low-end business China loses. The Boston Consulting Group, which flagged the return of some U.S.-based companies a year ago, says any comeback will be modest -- and gradual. And it won't be because anyone in Washington made it happen.

Art Pine
Contributing Editor, The Kiplinger Letter