At least that what the headlines should read following the Financial Times’ recent articles, US buyers turn to Brazil for cheap corn and Brazil Looks to Best Ever Corn Exports.
Allow me to explain.
International business drives the global economy. Without it, the domestic economies of the world would collapse. The recent import of Brazilian corn into the U.S. is an excellent example of this dynamic in action.
While U.S grain industry struggles to emerge from the worst drought in half a century, Brazil has stepped in to fill the void of a year’s worth of lost production.
If it were not for outsourcing, the U.S. drought would have triggered a catastrophic economic collapse of major industries.
Jobs and Corn. Its All the Same.
According to Forbes’ article, Outsource in Chief: Obama of general Motors, almost two thirds of GM’s jobs are in other countries. As the overwhelming majority of economists point out, the free flow of goods, services and capital across national boundaries is a natural part of the global economy.
In the absence of an integrated global market, ordinary goods–from shoes to computers–would be priced well beyond the reach of the average consumer and would likely be of inferior quality. Moreover, corporate profits would be constrained and wages would stagnate.
In short, no one would benefit.
I mention all this because there’s been a lot of debate this summer over outsourcing or off-shoring, as its also known.
At the most basic level, outsourcing is form of trade. It produces economic gains by maximizing what 19th-century economist David Ricardo termed “comparative advantage” in his 1817 book, Principles of Political Economy and Taxation.
Whether its goods or services that are being outsourced, the concept is straightforward: By outsourcing goods and services overseas companies can purchase products and services at a lower cost than if they had tried to create or perform them. Or is in the case of corn, outsourcing allows countries to rely on other supply chains in the event of shortages.
That gives companies the flexibility to increase efficiency and productivity, and creat an overall benefit to the economy. Meanwhile, the lower costs of less expensively produced services and goods are passed on to consumers.
In short, all parties benefit.
Here in the U.S., proponents of outsourcing argue that it increases productivity leading to more jobs. Opponents argue that it kills American jobs notwithstanding any gains in productivity.
Yes, some U.S. companies produce their products overseas in order to take advantage of lower labor costs — i.e., comparative advantage. But that means U.S. consumers get cheaper prices. You’ll notice no one complained when gasoline prices recently fell, even though much of that oil is produced overseas.
A recent Washington Post article, cites a study that concludes offshoring or outsourcing creates as many U.S. jobs as it takes away.
According to the study from the London School of Economics Center for Economic Performance, three economists examined 58 U.S. manufacturing industries from 2000 to 2007, and found an economic upside to offshoring—not just for American companies, but for American workers themselves.
The study found that offshoring tends to increase productivity and reduce costs, which can prompt firms to expand domestic hiring enough to offset the jobs lost to workers overseas.
According to the study, “Offshoring has no effect on native employment in the aggregate. While oﬀshore workers compete directly with natives, their employment generates productivity gains that ‘increase the size of the pie,’ leading to an overall neutral impact on native employment.”
Thus, contrary to the popular notion that outsourcing cuts takes away U.S. jobs, “manufacturing industries with a larger increase in global exposure (through oﬀshoring and immigration) fared better than those with lagging exposure in terms of native employment growth,” the researchers concluded.
That doesn’t mean that offshoring is unambiguously good for all workers in all industries: The paper explained that, in certain manufacturing industries, the native share of employment has “ambiguously” gone down, forcing workers who’ve lost their jobs to offshoring to look for work in another sector altogether.
As Jacob Laksin points out in his article, In Defense of Outsourcing, opponents focus only on the jobs lost, not the jobs created. Also, they all but ignore the jobs that are outsourced to the U.S. from foreign countries.
Laksin makes the point that:
Japanese auto manufacturers like Honda, Nissan, and Toyota have been building manufacturing plants in the U.S. since the 1990s. Today, Toyota operations in the U.S. sustain 365,000 jobs nationally and pay out over $20 billion in compensation to American workers. German firm BMW is another major outsourcer to the U.S., announcing just this January that it would invest $900 million in a Spartanburg, South Carolina factory, adding to the 7,000 jobs it has created in the state. Even India, traditionally a destination for U.S. outsourcing, is now outsourcing call center jobs to the United States, bringing the process full circle.
One must also consider that outsourcing helps to build affluence abroad, opening new markets for American-made goods. In this context, it’s not surprising that economists believe outsourcing strengthens rather than weakens the U.S. economy.
But don’t take my word for it. take a look at David Ricardo’s classic below—What do you think?