Outsourcing abroad of both manufactured goods and services has become very popular over the years. However, primarily due to the “jobless recovery,” this practice recently has received a great deal of negative attention. In an effort to gain an understanding of the impact of outsourcing, policymakers and others are asking a number of questions — many of which are answered here.

Co-Producing Manufactured Goods

Prior to the outsourcing of services abroad, traditional outsourcing involved the manufacturing of products by producers in two or more countries. Referred to as production sharing, cross-border manufacturing or outward processing, it allows a U.S. company to:

  • complement its strengths with those of the outsourcing partner in order to create greater value;
  • gain access to unique technology, raw materials and intermediate inputs;
  • reduce overall costs; and
  • retain higher wage jobs, product development, design, marketing-related activities, and capital-intensive manufacturing in the U.S.

For many U.S. manufacturers, production sharing is the only viable strategy available to increase their level of global competitiveness.

Many Countries Use Production Sharing

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union (EU), most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production is taking place in Northern Africa.

How big is production sharing? According to the World Bank, production sharing involves more than $800 billion or 30 percent of total manufacturing trade annually.

As global competition continues to increase, production sharing is one strategy being used by U.S. producers to stay ahead of the curve. This may involve, for example, the capital, technology and engineering skills of a U.S. producer combined with precision assembly provided by a Mexican or Chinese partner. The result: an attractive top-quality product with worldwide appeal.

What If Production Sharing Were Discontinued?

In the late 1980s, the U.S. International Trade Commission (ITC) conducted a survey of 900 U.S. firms that utilized production sharing. When asked what they would do if their production sharing operations were terminated, their answers, ranked in order of frequency, were:

  • Turn to foreign suppliers of components;
  • Drop labor-intensive products and import them from East Asia;
  • Move all manufacturing to Asia;
  • Cut back U.S. production and target a market niche not threatened by imports; or
  • Go out of business

Since the 1980s, production sharing has become vastly more important to U.S. companies and workers. And, according to the ITC, it has been responsible for generating new jobs and retaining jobs that would have been lost due to intense foreign competition.

The Outsourcing of Labor Intensive Services

In recent years, labor intensive services have begun to be outsourced to India, the Philippines, Malaysia and other countries with large, well-educated, English-speaking labor pools. This has been made possible by new technologies that allow for the transfer of huge amounts of information around the world at minimal costs — coupled with the ability to digitize and computerize many services.

Since outsourcing of services is structurally simpler than manufacturing outsourcing in terms of resources, space and equipment requirements, outsourcing of services is anticipated to accelerate. But, how much? Forrester Research predicts 3.3 million U.S. service jobs will move offshore over the next 15 years. What does this mean for the U.S. economy and labor?

According to a recently published McKinsey Global Institute report, two-thirds of the economic benefits from outsourcing services to India flow back to the U.S. Plus, U.S. companies that outsource generate greater profits, become more globally competitive, and are better positioned to sell more goods and services worldwide. Furthermore, the report says that fear of massive job losses is unfounded since the vast majority of services cannot be outsourced and will remain in the United States.

As noted above, companies that outsource become more globally competitive. As this occurs, it’s logical to assume they will grow, and eventually hire more workers here in the U.S.

The U.S. Economy Is Predicted To Generate 22 Million New Jobs

The loss of a job can have a tremendous impact on a worker and his or her family. But thanks to the U.S. economic ability to create jobs, there is a very good chance that a service worker who loses his or her job due to outsourcing or other reasons will find another job within a reasonable period of time.

According to the McKinsey report, dislocated U.S. service workers find new jobs more quickly than manufacturing workers. Plus, the United States has the highest rate of reemployment of any OECD country by a factor of nearly two times. Yet, the most compelling data on job creation may be based on past performance.

Although the United States incurred several periods of slow and negative economic growth from 1970 through 2000, the economy still produced 60 million jobs during this time — that’s an average of 20 million net new jobs each decade.

Surprising to many, the job projection for this decade is even higher. According to the U.S. Department of Labor, Bureau of Labor Statistics, the U.S. economy is predicted to create 22 million net new jobs by 2010. And service-producing industries are expected to account for approximately 20 million of these new jobs, says the Bureau of Labor Statistics’ Occupational Outlook Handbook 2002-2003.

How Well Do Service Jobs Pay?

When some people envision the service sector, they think of low-paying jobs. In reality, the U.S. service sector has become extremely advanced and internationally competitive. In turn, the sector’s wages have risen considerably.

For example, in December 2002, January 2003 and February 2003, average hourly earnings for service production workers reached $15.49, $15.51 and $15.65, respectively, according to the Bureau of Labor Statistics. During these months, average hourly earnings for U.S. manufacturing production workers were $15.48, $15.53 and $15.56. This indicates that hourly wages in the service sector have finally caught up to and even surpassed the manufacturing sector.

Service Exports To Rise

In 2002, rising U.S. service exports represented 30 percent of total exports. Interestingly, service exports also equaled 60 percent of the manufacturing trade deficit. However, since a large value of exports are not captured in government statistics, many believe service exports are considerably higher.

Regardless of the actual value of service exports, one thing is certain: they will continue to rise. And it is increasingly likely that the telecommunications/digital infrastructure that is making the outsourcing of services possible is the same infrastructure that will significantly boost service exports.

This article appeared in Impact Analysis, November-December 2003.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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