Insourcing, Outsourcing, Offshoring, Inshoring - What's Going On?

In recent years, much has been written about the ongoing trend for American businesses, both large and small, to move some of their operations overseas to reduce costs. In particular, as a result of improvements in telecommunications technology and a drop in the cost of securing the use of international data networks, India has emerged as a key center for what is known as offshoring. In economic terms, this is a result of corporations utilizing the comparative advantage of Indian workers who provide the same or similar service to their US counterparts, but more efficiently due to their reduced cost.

Of course, there are a wide number of issues that come along with offshoring, which has morphed from a fairly descriptive term to, at least in some circles, a very negative phrase associated with downsizing, reductions in force and unfair trade. In addition, the phrases offshoring and outsourcing have become co-mingled. Outsourcing, of course refers to the process by which a company decides to focus on a core competency and contracts out work on say, information technology or human resource work to another company. Offshoring, on the other hand, refers to moving a given operation outside of ones predominant nation of operation, for example from the United States to the Philippines. In many cases, firms have chosen to employ additional workers in the offshored location, and so outsourcing is not involved. There are of course many cases as well where outsourcing and offshoring go hand in hand as operations are moved outside of a company to another firm, which then locates the work overseas.

The arguments against these sorts of arrangements are varied, and they often carry with them a great deal of emotional heat and resonance. This of course makes sense. Economic dislocation caused by outsourcing and offshoring is real and painful to the affected parties. The movement of one's job outside of ones nation is significant and cannot be easily overcome. Where in the past if a job was relocated to head office, an employee may have been offered the option to move to follow the job. This is very rarely the case with offshoring since one of the key intents of the process is to replace a more expensive US based worker with a lower cost worker in another jurisdiction.

A similar process has been underway in manufacturing for decades. As wages and costs of production rose in America, more and more US companies moved their manufacturing functions out of the United States and increasingly into other countries. The economic affects were jarring, but at the end of the day the main benefit to the people of the United States was a decrease in the cost of consumer goods. In the past twenty years, America has by and large experienced low inflation and an improvement in standards of living. This was in large part due to the decrease in the cost of consumer goods, which accounts for most of the US productivity gains over that time. So, the trade off was not so much in terms of one job versus another, but rather a broader economic adjustment that reduced wages in some sectors, and reduced costs across the broad economy.

A further argument against offshoring manufacturing and other business is that it reduces quality. In particular, concerns about the safety of goods produced in China have increased as there have been a series of high profile reports of substandard practices in producing, among other items, children's toys. To broadly indicate that all goods manufactured outside of the United States are of a substandard quality, however, is clearly false. Americans are smart consumers, and they vote with their feet. Japanese automobiles, for example, are a widely noted example of how Americans, though initially resistant, have embraced products produced outside of America. Quality ratings for these products are high, and the US manufacturers have had to work hard to compete for the consumer dollar in the transportation market. In this case, not only has the consumer benefited in getting a quality foreign product, but they have also seen improvement in products made domestically. In addition, in one of the other notable results of trade in automobiles, foreign car manufacturers have increasingly built plants in America, effectively offshoring work from places like Japan to places like Tennessee.

This, then, gets down to the nub of the matter. Offshoring introduces more competition to the system. This aspect of trade is something the United States has consistently argued for throughout its history. The belief has been, and really continues to be, that on a level playing field, America can compete and win in any number of sectors. Competition, as has been demonstrated over time, helps produce efficiency and the use of comparative advantages in this regard helps produce healthy and profitable businesses. Ultimately, this is good for stability and is deflationary - in other words, efficiency is our biggest tool in battling against inflation - not interest rates.

Again, most Americans would agree that competition is good, but the playing field must be fair, and that is a reasonable expectation. The United States must work towards ensuring all of its trading partners comply with the World Trade Organization rules, the General Agreement on Tariffs and Trade and other international agreements, and America herself must set an example in being a beacon of competition and trade liberalization, so that we can continue to demand the same of others. However, at the end of the day, the economic and technological forces that are shaping the changes in our lives around the world are not effectively within the scope of the US to regulate. We must, rather, roll up our sleeves, enroll in that night class, start that new business and compete on the world stage. Our history shows that when we optimistically embrace such challenges, we are well equipped to do well, and have a history of success.