The fear of offshoring

The fear of offshoring

As mid-term elections approach in the US, a wave of protectionism seems to be engulfing that country. If news reports are to be believed, the US state of Ohio has banned outsourcing of government information technology work to offshore locations such as those in India. Ohio is only a new entrant in what is a growing trend: states such as New Jersey and Virginia have taken similar steps earlier.

Ted Strickland, the governor of Ohio who passed the ban, is a beleaguered Democrat incumbent in a deindustrializing swing state in the American rust belt. The Democrats are facing a difficult mid-term season. Thus, his politics is understandable. The economics of protecting US jobs is, however, dodgy at best. In the first place, offshored jobs confer cost advantages on US businesses, making them deliver products and services at lower costs and greater profits.

Empirical estimates of US jobs that can be offshored are hard to make. Estimates vary wildly from 11% to 38% of all US jobs. More reliable estimates, such as the ones made by Princeton University economist Alan Blinder, peg the figure at around 25% of US jobs. Politically, this is an explosive number. But what is ignored here is that not all these jobs will be offshored. There are job loss estimates calculated when historic economic transitions such as those from agriculture to manufacturing and from manufacturing to services take place. But not all those jobs are lost. For example, Blinder estimates that even after decades of offshoring manufacturing jobs, some 10% US workers still work in industries though all these jobs are, in theory, capable of being offshored.

The policy response to these transitions requires innovative thinking on educational and retraining efforts. Old labour market divisions such as those between “high-end" and “low-end" jobs are no longer valid in the offshoring world. The appropriate distinction now is between jobs that are tradable and the ones that are not. What this means is the new distinction is between services that can be delivered from far-off locations and those that can’t be. Here the high-end and low-end job demarcation, based on education and skills, loses explanatory traction.

Unfortunately, US politicians are least interested in devising strategies to meet this new challenge. They continue with the old idea of protecting jobs with tools such as tax breaks, punitive measures and outright protectionist controls. This is akin to farmers trying to ward off the industrial revolution by not supplying grains to cities.

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