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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.
Dr Hans F. Sennholz
www.sennholz.com
Dr. Sennholz is President
of The Foundation for Economic Education, Irvington-on-Hudson, New York and a
consultant, author and lecturer of Austrian Economics.
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