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Offshore Outsourcing: An Endangered Species

Offshore Outsourcing: An Endangered Species

The ‘farce’ of free enterprise comes under attack in the U.S.

By Kenneth Hess

It’s no longer about greedy American corporate executives – it’s about the long-term effect on the economy and destroying America’s tax breadbasket: The Working Middle Class

 

If you’re a buyer or seller of offshore services, beware that American voters have your livelihood in their sights. US unemployment numbers in December 2010 stood at over 14.5 million, which is just under 10% of the working population. High unemployment, rampant offshore outsourcing, a rapidly shrinking middle-class tax base, and overall lower spending is putting economic pressure on politicians to make some changes to boost the ailing economy.

Last year marked the introduction of two bills (H.R. 5622 and S. 3816), known as The Create American Jobs and Ending Offshoring Act, designed to end access to tax havens, to protect the American worker by offering tax incentives for hiring Americans for offshored jobs, and to end tax breaks for American companies that move their businesses offshore. The bills failed to pass into law but there’s little doubt that similar bills will be introduced during the current Congressional session. The voting unfortunately fell along party lines with Republicans voting against and Democrats voting for the bills.

Opponents to the bills state that offering tax incentives wouldn’t boost the economy and that the money would be wasted. Further, opponents claim that government interference hurts business and therefore would provide little motivation for additional local hiring. The Republican Party favors less government interference in business, quoting the idea that economies will level themselves without outside (government) assistance. Bill advocates plead that tax-related enticements would boost localized hiring, lower unemployment, create a stronger tax base, increase spending, and protect the public interest.

The truth is, both parties have failed to read the definition of Free Enterprise.

According to the Merriam-Webster dictionary, the term Free Enterprise means “freedom of private business to organize and operate for profit in a competitive system without interference by government beyond regulation necessary to protect public interest and keep the national economy in balance.”

American workers, especially the unemployed American worker, are tired of seeing billions of American dollars going offshore to construct infrastructure, provide training, and invest in foreign economies with the sole purpose of displacing American workers and replacing them with foreign ones. And, to add fuel to the fire of anti-offshore sentiment, US-based companies are using tax incentive dollars and deploying funds to tax haven countries to take those actions. American workers also know that there are laws in place in other countries that protect their workers. Free enterprise no longer seems to be free. Its price is American jobs.

Stimulating the American economy….not

 

The fundamental problem lies in the fact that if we destroy our middle class workforce, which incidentally is the tax base breadbasket for the entire country, then we’ll become a poor nation with economic extremes and no stratification. In other words, America will look like so many other corrupt countries where there are the very rich, the very poor, and a few in-between. One proponent of the offshore model stated that, “By using nearshore resources, we might keep them from crossing the fence into the US”. The problem with that statement is that you rarely see programmers, systems administrators, or corporate executives cutting fences to get to the “Land of Opportunity.”

A related issue is that American money invested in foreign infrastructure, training, and salaries does very little to stimulate America’s economy. Foreign workers don’t pay taxes to the U.S. and they typically don’t purchase American goods or services. In essence, the money paid out to foreign workers by American businesses is wasted. We, as a nation, receive no benefit from those offshored salaries and investments.

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Solving the dilemma?

 

The answer to the problem, that either no one wants to hear or that everyone wants to ignore, is to assume an attitude of cooperatition. A good definition of this term is found at cooperatition.com: “Cooperatition is an economic model of combining the merits of business cooperation and business competition. This is in contrast to the standard business objective of eliminating the competition at all cost.” In the realm of offshore outsourcing and doing business in other countries, we should do the following:

  1. American companies should hire Americans for work performed in the US.
  2. Those companies should hire foreign nationals in countries where that business is performed.
  3. Companies should accept no tax incentive dollars for displacing American workers.
  4. Countries where offshoring is done should be required to counter-invest in America.
  5. Balance the dollars spent in foreign countries with American investment.

American companies need to hire American workers for work performed for other American companies. Similarly, if an American company does business in another country, local workers should be hired to perform that work. There should be no tax dollars or other incentives paid by the American people to companies that displace our workers.

Popular locations for offshore outsourcing should be required to counter-invest in countries that offshore work to theirs. It is unfair to have the flow all in one direction. Such practice is little more than charity and it shows that those “taker” countries have no incentive to contribute to anything outside their own borders. Finally, American companies that invest money and resources into offshore concerns should invest an equivalent amount in similar pursuits at home: training, infrastructure, employment.

For the past 10 to 15 years, American companies have enjoyed unchecked and undeterred dumping of American workers in favor of cheap foreign labor, tax money to carry out their plans, and no government regulations to stop them. This trend is about to change. The American people understand the detrimental economic effect that these practices have. The farce of a global economy is about to surface. The global economy is composed of local economies. And, it is those local economies that are starving in order to feed the corporate machine in the name of free enterprise.

Ken Hess is a technical analyst, author and consultant. He writes regularly for Linux Magazine and ServerWatch. Read his other article for Nearshore Americas here.

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4 comments

  1. "A related issue is that American money invested in foreign infrastructure, training, and salaries does very little to stimulate America’s economy."

    I can think of three ways it does:

    1. Provides the American market with lower cost products and services

    (iphone manufactured offshore: $178.96; iphone manufactured in U.S.: US$240
    http://www.whatsoniphone.com/blogs/iphone-3gs-howhttp://curiouscapitalist.blogs.time.com/2011/01/1

    2. Increases profit, which (should) be then redistributed to shareholders for re-investment in the American economy.

    3. Low cost offshore services provide small businesses with the resources they need to start operations without requiring a huge initial investment (software design, accounting services, date storage). This in turn drives job creation and reinvestment in local economies.

    If the U.S. economy finds it cannot function effectively in the new "competitive system" created by the "new" global economy" without severe regulatory reforms, maybe it's time to rethink how the U.S. economy operates at a fundamental level.

    And I do not believe that over regulating business to save the American worker is an answer. When costs of operations get too high in any country, the company will leave, or find ways around it. Witness Goldman Sachs actions with regards to the Facebook offering when faced with over regulation: they simply locked out American investors.

    "Now, only non-U.S. clients will be able to invest in Facebook through Goldman, the financial services giant said in an e-mailed statement, citing “intense media coverage” as the motivating factor in the decision.

    "“Goldman Sachs concluded the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law. [We] regret the consequences of this decision, but we believe this is the most prudent path to take,” the statement reads."
    http://mashable.com/2011/01/17/goldman-sachs-us-f

  2. 1. The savings isn't that great. For a difference of $61, I'll take the American made one.

    2. There are some who still believe in the "trickle-down" theory but it doesn't work. Never has. Never will. Good example: Stimulus money that was rained down on the companies that were already shown to be frivolous and irresponsible with funds. They gave themselves big bonuses.

    3. That's one of the arguments for offshoring. The jury is still out on its impact on the local economy through investment.

    Over regulation is never a good thing but other countries have laws in place that protect their workers. America doesn't. We need to protect our economy, our workers, and our national security. It would help if the countries that we supply money and jobs to would grace us with similar investment.

    I am not totally against offshore outsourcing. It can be a good thing. I think fair trade should be a requirement. When you bleed off millions of jobs from any economy, there is a negative impact.

  3. Thanks for the reply Ken,

    In response:

    1. I provided one example, and that is manufacturing cost, not wholesale or retail price. The $61 turns into a difference of $102 at wholesale and $170 at retail with a 40% margin. Would the average consumer pay (or be able to pay) 35% for products?

    2. Agreed on the use of stimulus funds; however, the U.S. already has a mechanism in place that (in theory) regulates how earnings should be distributed to shareholders: the stock market. Yes, the companies failed ethically when they used stimulus funding to provide bonuses. The government and the undereducated stock holder failed practically when they allowed them to do it. In any case, this does not deny or negate the fact that companies used off shoring practices to earn higher profits. What is at issue is how those profits were distributed.

    3. I have disagree on this point. The small business sector is vital to the stratified economy you say is at risk, regardless of the country. Any tool that can assist this sector is necessary, especially tools that add value for the end consumer.

    Off shoring can, and is, a good thing. But like anything else, it has a learning curve. Instead of protectionist approaches, shouldn't the U.S. government, business leaders, and workers be exploring ways to get ahead of this curve and reap the benefits a global economy has to offer? Because other countries already are, and if the protectionist strategies are pursued, the result will be high priced U.S. products facing low cost "foreign" alternatives, which will increase in quality, in the expanding global market.

  4. I think what is beng advocated by the article is isolationism and protectionism. Another round of "buy American". Nothing wrong with that, except that America invented the theory of free markets and free enterprise. America is the greatest country in the world! the proposal makes it look like America is some sort of third world backwater country. A reaction like that is natural in times of high unemployment. I see several problems to a reaction like that, especially if you include both products and services: (1). A sharp increase in the price of products and services – do you know what is the American content of an iPad? do you know how many products in a Wal-mart come from Asia? (2). An increase of isolationism in America would be the trigger for a round of isolationism globally, and that would really have an impact in American exports. Remember – this is not a one-way street, America buys products and services from abroad, and America sells products and services abroad. The limitation of this proposal is that only sees the "buy" part of the problem. What if Brazilian buyers of airplanes would say "no more Boeign for me, only Embraer" ? would that be good for America? (3). The fundamental problem is one of competitiveness. America needs to invest strategically in infrastructure and education. Have you been to the Shanghai airport? Have you been to Singapore? Have you seen the rankings of American students vs. students globally in Math?. America has the best graduate schools and the best entrepeneurial system. Even that may change. What America need to do is to regain its stature in the world, re-think the long term priorities, make some short term sacrifices for long term gains. Not a "nice" road to travel, but it is what it is.

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