For three decades the United States of America has been battling inflation while trying to stimulate the economy. This battle caused many changes in economic policy as a trial and error approach was enacted. In the 1990’s, President Bill Clinton tore down the trade barriers by enacting the North American Free Trade Agreement (NAFTA). In 1998, the government saw it’s first surplus in 30 years. By the year 2001, the country once again found its self falling into recession. The cause of this recession has been ascribed to sources such as corporate scandal, the dot-com bubble, and even the natural process of the economic cycle. Whatever the reason, it remains true that businesses are looking for solutions to keeping their competitive advantage. With the rising cost of labor and falling levels of production, offshore outsourcing is necessary for companies to keep their competitive advantage.
There are many people that would argue that offshore outsourcing has been too radical of a solution for businesses and has taken jobs from many families and left them with no income. The political involvement in outsourcing, while it has shed some light on this controversial subject, has hurt the process. Addressing only the loss of jobs gives the public a half-truth and remains just a small portion of the offshore phenomenon. The realities of politics are such that one cannot even suggest that job losses or outsourcing is a necessary component of a healthy economy. Any statement like this brands one insensitive, at best, or a fool, at worst. It also means that politics force politicians to take public positions that are only partially truthful. (Suranovic, 2004)
Reallocating resources is a necessary to increasing productivity. As well, it also increases economic growth. (Suronovic, 2004). The reallocation of resources is somewhat code speak pertaining to the loss of jobs. The loss of jobs has been the major argument against the process of outsourcing. As companies are able to outsource their payroll, software, and customer service departments they begin to concentrate on newer, higher paying jobs such as logistics. With these departments releasing jobs to foreign countries, it creates new logistics opportunities for displaced workers.
Since the end of the recession 1.9 million more workers are employed. Outsourcing is a two-way street. Just as jobs have been moved out of the country, jobs have been moved in, as well. “According to the Organization for International Investment, the numbers of manufacturing jobs insourced to the United States grew by 82%, while the number outsourced overseas grew by only 23 percent.” (Kane, Schaefer, & Fraser, 2004)
Contrary to what some may believe, outsourcing is not a new concept. Through the history of trade, elements of outsourcing can be seen. Outsourcing is a new term for a trade practice that has been in effect for as long as there has been trade. Anytime a company contracts to another company to provide components or labor to complete their product that company has outsourced. “Back in the early years of US History, the making of America’s covered wagon covers and clipper ship sails was a job outsourced to workers in Scotland, with raw materials imported from India.” (Kelly, 2004). In more recent times, outsourcing was limited to merely a state away which was meant to relieve small efficiency issues rather than economic problems.
Outsourcing emerged a few thousand years ago. Wherever small communities and societies began to form, people with specialized professions began to trade with each other for goods and services. In effect it can be said that each worker was outsourcing some activities to others. This shows that the outsourcing trend is not a new concept. By the time the Industrial Revolution arrived, most companies were no longer outsourcing. In-house, they were meeting all the needs of the company. This was in-part the cause for increased cost of product. As the demand for products rose, new laborers were hired to meet the production needs. This, along with the advent of unions, caused the cost of labor to rise.
Inshore outsourcing began when the costs of production and labor rose to proportions that increasingly dropped the profits of the companies. The term is largely unknown because it has been called contracting. Contracting is the same process as offshore outsourcing. The terms of offshore and onshore are relatively unused when discussing outsourcing. When one begins to correlate outsourcing with contracting, you begin to understand that companies have been outsourcing for a very long time. Contracting has been a way for companies to keep their competitive advantage by lowering labor costs, decreasing payroll taxes and hidden costs of compensation and training. By having their consultant, or contractor, meet the needs of the product, companies were able focus on their inhouse needs such as staff meetings, and producing company reports. Yet, even with that improvement, companies still battle high costs of labor and production.
Although outsourcing is conceptually a reinvention of business resource, the recent recession mixed with the prospect of a global trade economy has caused offshore outsourcing to become a solution for businesses struggling to keep their advantage. To keep that advantage, companies are looking to lower their costs on labor and production. “The standard case for free trade holds that countries are best off when they focus on sectors in which they have a comparative advantage — that is, sectors that have the lowest opportunity costs of production.” (Drezner, 2004). Drezner further states that when countries specialize this way, it results in cheaper goods for all consumers globally. It falls to basic principle that the cheaper a good is produced, the cheaper that good will cost the customer.
In all business models, labor cost is an ever cycling objective. As supply must meet demand, companies must employ workers to make that supply. Offshore outsourcing meets that competitive advantage of lowering labor costs by transferring jobs to lower wage countries. “Wage rates can be as low as one-tenth of what they are domestically” (Mears, 2004).
The major cause of high labor costs to companies started with the emergence of unions during the Industrial Revolution. Unions were created to counter-balance the wealth and power of business moguls. They helped end child labor, increased wages, provided health care, and generally brought the attention of workers rights to the front.
The truth is that unions are essentially parasitic organizations that thrive only by draining and ultimately destroying the companies and industries they control. The essential goal of unions is to compel the payment of higher wages for the performance of less work and less productive work. (Reisman, G. 2005)
Unions have lobbied the government since their inception. It is not surprising that politicians are encouraged by unions to protect american jobs. The irony of current legislation is that while foreign employees are not allowed to immigrate here permanently, they are allowed to come for a short time, get training, and return to their country. So it begs to answer the question of why businesses will look to those countries for labor.
The statistical information involving the economy, trade, and politics show that offshore outsourcing has been a scapegoat for problems arising from the trial and error approach to economic policy. Davis (2005) asks us to consider that the size of the paycheck isn’t the only measure of economic stability. The price a person pays for goods is another. Opening ourselves to foreign trade is an economical revolution. Just as businesses now see that offshore outsourcing is a corporate evolution.