Jobs Are Moving Abroad

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Outsourcing – the business practice of moving operations and
jobs to other countries – undoubtedly is the crucial issue
of the European Union. Facing Union-wide competition, companies
are eager to move to places where conditions are more favorable.
They may want to leave France, Germany, and Italy where labor legislation
and regulation condemn many millions of workers to chronic unemployment.
They may prefer to move to new E.U. member states where labor is
less encumbered and production costs are much lower. But such moves
give rise to loud calls for government intervention, especially
in countries that see themselves as losers and victims of the freedom
for companies to move. Indeed, outsourcing is casting grave doubts
about the future of the European Union.

In the United States, offshoring – the business practice of
moving operations overseas, usually to less developed countries
with lower labor costs in Asia – has become a major political
controversy. It played a major role in the 2004 presidential election
in which Senator John Kerry, the Democratic Party’s candidate,
denounced corporate executives who were offshoring American jobs
as traitorous “Benedict Arnolds.” He and many of his colleagues
proposed legislation to eliminate all tax breaks to corporations
that export jobs. Offshoring undoubtedly will play an even bigger
role in future elections when many more jobs will have gone abroad.

Loud voices of protectionism were heard already in 1992 when the
North American Free Trade Agreement was to lower trade barriers
and make the United States, Mexico, and Canada more competitive
in the world market. It raised loud fears that it would lead to
ever greater expatriation of U.S. jobs to Mexico where labor is
less expensive (see Myths
booklet). The same voices now are sounding the alarm about American
jobs going to China and other Asian countries. Moreover, they are
greatly upset about the nature of the work being exported. In the
past, American companies had concentrated on transplanting low-skilled
jobs which minimum-wage legislation and benefit regulation had made
unlawful (see The
Politics of Unemployment
). More recently, the voices have
focused on professional jobs going to China, India, the Philippines,
and Malaysia where university-trained technologists are engaged
in software engineering, computer chip designs, and code writing.
After all, many thousands of engineers in those countries studied
at American universities and acquired such expertise. General Electric
Corporation has sent most of its technology services to graduates
in China; Aetna is sending them to India.

Many legislators are eager to call a halt to such exports of American
jobs. They are ready to levy steep fines, raise taxes, or imprison
the violators of their laws and regulations. But they are not willing
to lower the benefit costs which they imposed. In their private
lives many were attorneys, counselors-at-law, civil servants, educators,
or heirs to family fortunes before they embarked upon political
pursuits. Few are knowledgeable economists familiar with basic principles
of economics. Instead, they usually are enamored by their own position
and especially by their great legislative powers. The only limit
they may recognize is the political clout and vote of other legislators.

Most members of Congress are unaware of the inexorable principles
of foreign trade and international cooperation. One of the great
19th century economists, David Ricardo, clearly elaborated and stated
them. He propounded the Law of Comparative Cost, better known as
Ricardo’s Law of Association, which applies to the common situation
in which economic goods move readily across national borders but
governments prevent capital and labor from moving freely. Under
such conditions, people everywhere benefit most if they concentrate
on the production of those goods in which conditions are most favorable,
leaving all other production to others. The case is similar to that
of a surgeon who concentrates on surgery and leaves all supportive
work to his assistants although he also excels in their simple tasks.
And it is similar to that of a master mechanic who relies on his
apprentices and assistants for ordinary work, although he could
outdo them readily, but chooses to concentrate on the work requiring
greater skill. Cooperation and division of labor benefit all (see
The Politics of Unemployment).

In Ricardo’s time the mobility of both capital and labor was
limited rather severely. Later in the 19th century, under the influence
of classical economic thought, both capital and labor became rather
mobile (see On
Liberty
). They created the “world market” with
rapidly rising productivity and standards of living. During the
20th century, unfortunately, economic nationalism and rampant socialism
closed many borders and precipitated not only ugly trade wars but
also numerous armed conflicts. After World War II the “cold
war” between the Soviet and American blocs of nations divided
the world, creating political tension and military rivalry short
of actual war. Yet the comparative differences in production cost
allowed both sides to benefit from peaceful trade.

Ever since the disintegration of the Soviet bloc the market order
has gradually expanded to most corners of the world and business
capital has assumed new mobility, seeking employment wherever production
conditions are favorable. But no matter how mobile capital now may
become, it cannot nullify Ricardo’s Law of Association as long
as labor lacks the mobility to move freely and expeditiously from
country to country. The great differences in religious, racial,
national, and cultural characteristics as well as the notable differences
in birth rates and mortality rates will never allow man to spread
evenly around the globe, but they may encourage him to engage in
peaceful cooperation and international trade.

There cannot be any doubt that the problems of offshoring will be
with us as long as economic conditions change and business is free
to move. American business may move abroad, and it may come back
again. Guided primarily by cost and yield comparisons many American
companies are known to have canceled outsourcing projects in Asia,
citing poor employee training and performance, inadequate support,
personal and property security concerns, and political arbitrariness,
hostility, and corruption. They must cope with anti-offshoring legislation
and political malice wherever they would like to leave and with
unfair competition laws and regulations where they like to settle.
After all, construction of a modern plant undoubtedly leads to the
closure of many old shops and relocation and training of their employees.
Surely, closure of shops and relocation of workers are painful also
in Asia.

Economists
like to reflect on all the effects of a business move to places
and countries where it is more productive. They are ever mindful
of Ricardo’s Law of Association which affirms that trade benefits
both countries. And they are elated when foreign competition persuades
legislators and regulators to reduce their obstacles and restraints,
trim mandated labor costs, and remove employment barriers. But they
are saddened by the rising mood of protectionism in Europe as well
as in the United States. The voices of nationalism and socialism
are rather persuasive; they speak of interest, not of reason. They
pay no heed to the old precept: What you do to others, they will
do unto you.

August
23, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

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