As a key element of free trade, the concept of “offshoring” is nothing new. In the United States, offshoring-rclocating work t, countries where costs are lower-has been around since colonial times. The manufacture of toys, televisions, steel, and automobile has been outsourced to lower-cost producers over recent years, and U.S. consumers have enjoyed a plethora of low-priced goods, with no loss in quality, as a result. Though many blue-collar jobs have been lost in the process, offshoring has been an accepted part of the equation because by and large new and better white-collar jobs have sprung up to replace the old ones.
This is a natural process that is difficult, if not impossible, to stop. Nevertheless, the mere mention of off shoring today incites alarm among the public. Well-educated American workers read about soft ware programmers in Bangalore earning S6 an hour, while similarly trained domestic programmers are paid $50 or $60 an hour, and not surprisingly, they begin to worry about losing their own livelihoods. Ten years ago, offshored American jobs were mainly limited to manufacturing, a sector of the economy already in deep decline. Few people were surprised to see further erosion in that sector.
Offshoring service-sector jobs, though, is a new phenomenon, and it is growing fast. A widely cited example concerns radiologist: in India who examine X-rays from clinics in Miami and Chicago, and then transmit their diagnoses back via the Internet. It isn’t hard to imagine other types or workers that might be affected: reservation agents, accountants, financial] analysts, and anybody else who performs tasks that are easily replicable with the aid of a computer.
In fact, during the last presidential election in the United States, the migration of relatively skilled jobs overseas became a major issue for debate, attracting widespread comments. Few politicians can afford to ignore the more politically savvy and vociferous section of the workforce whose jobs are under threat today. Critics of the Bush administration's commitment to free trade charged it with presiding complacently over a massive loss of jobs to overseas companies.
According to these critics, the revolution in information technology, and especially the development of the Internet, has made it easy to export service-sector jobs that used to be considered safe. This, they claim, has transformed the nature of the threat represented by offshoring. This kind of criticism was frequently allied with a suspicion that U.S. corporations were lacking advantage of globalization to swell their coffers at the expense of white-collar workers. Statements such as that by former Hewlett-Packard CEO Carly Fiorina that there is no job that is America's God-given right anymore” only fueled people’s fears.
Nonetheless, most economists continue to preach on the efficacies of free trade, citing the principles of the early nineteenth-century economist David Ricardo. Whereas Adam Smith had argued that nations gain by exporting whatever it is they produce more cheaply and ignoring those markets in which they are less competitive-the theory of absolute advantage-Ricardo took a different tack by asserting that trade between countries continues to make sense even if one of the countries has an absolute advantage in every industry. He says that countries with low costs benefit most by focusing on those sectors where they have the largest advantage. Even if, to cite Ricardo's example, country A can produce both wheat and wine more cheaply than country B, it is in country A's interest to concentrate its efforts on producing the product that offers the biggest differential in profit, in this case wheat, and leave the other country to produce the comparatively less profitable wine.
Following this logic, the United States should embrace offshoring and devote its resources to more productive purposes. This implies that the United States shouldn't frantically hold on to low-profit businesses, such as insurance processing and call centers, even if workers provide higher quality services than their counterparts in developing countries. Instead, it should concentrate on building up businesses like publishing and entertainment, where displaced workers can be employed more productively.
But how does trade with rapidly growing economies like China's and india's benefit the United States? Here, Ricardo’s theory needs to be applied carefully. In the book Global Trade and Conflicting National Interests, economists Ralph E. Gomory and William J. Baumol examine what happens when a low-wage, “underdeveloped” economy begins competing with a high-wage, “developed” economy. The results of their analysis are startling. “If the wage differential between two trading countries is sufficiently large, the loss of industries to the low-wage, underdeveloped country may well benefit both countries at the national level,” they write. “However, as the underdeveloped country develops and starts to look more like the developed one, the balance turns around and any further loss of industries becomes harmful to the overall welfare of the more developed nation.”
Politicizations should bear that in mind when they make important decisions. Free trade can be good for everybody, but there are limits to how far we should go.