Several decades ago, as Albert Einstein monitored an exam for a graduate level physics class, a student raised his hand and said there was a problem: the questions on the exam were the same as the previous year’s test. Einstein agreed. The questions were indeed the same, but in a year’s time the answers had changed completely. Given the accelerated pace of change today, the “answers” are not just different from those of last year. In many cases, they are even different from those of last month.
Many Americans, as well as Members of Congress on both sides of the aisle, do not understand why some answers that seemed appropriate only a few years ago do not apply today. On the other hand, some do indeed understand, but choose not to accept the new realities. For example, several policymakers have revealed to this author that taking a globalist view in support of international trade is dangerous to their job security. In fact, one Member of Congress said he understood the need for some companies to outsource services abroad, but could not sell that reality back home. When it comes to outsourcing abroad, also known as offshoring, many politicians are basing their policy decisions on outdated assumptions that may sell in their Congressional districts. But in the end, these anti-globalist positions actually will hurt, not help their constituents.
The fear that offshoring will result in fewer good jobs for American workers is understandable since some activities include the movement of knowledge-intensive services to India and other countries with educated, less expensive, English-speaking labor pools. But careful analysis reveals that worldwide sourcing—made possible by new technologies that digitize and cheaply transmit information around the world—provides real benefits. Unfortunately, little evidence of this has been publicized. And when companies communicate a strategy to outsource certain services via a public relations campaign, they often do so poorly. This does not help. In turn, due to misinformation about offshoring, fear of negative publicity, political pressure, investor objections or employee criticism, many companies have either cancelled or not executed offshoring contracts. Many state agencies have incurred the same problems and turned a blind eye to offshoring opportunities that could have saved their tax payers millions of dollars—funds desperately needed!
If placed in the larger context, offshoring is seen as one of several means by which jobs are lost in the short-term. History tells us that new technologies and improved business strategies displace jobs. For example, automobile workers replaced buggy makers, while ATMs, voice mail and voice recognition software eliminated bank teller, receptionist and medical transcription jobs. As pointed out earlier, the U.S. economy loses an average of 31 million jobs annually. But new jobs are created more quickly than old ones are lost. New technologies, innovation and higher productivity, the primary causes of job turnover, also known as job churn, actually increase wages and improve living standards. In turn, new industries and higher skilled jobs emerge. Thus, Forrester Research’s estimate of 3.3 million service jobs moving offshore by 2015 represents a small fraction of job churn. How many Americans are familiar with this reality?
Lower-tech jobs most likely to be outsourced, such as bookkeeping and customer service, are projected to increase in the United States. And higher-tech jobs prone to outsourcing, like computer programming and software design, also are expected to increase here, according to the Labor Department. In fact, from 2002 through 2012, all U.S. computer-related occupations are estimated to grow by 15 to 57 percent. That’s not all. Many back office jobs (some more skilled than others) are estimated to grow in the United States. For example, paralegal jobs are projected to increase by 28.7 percent, bill and account collector positions are estimated to grow by 24.5 percent, customer service representative occupations are estimated to increase by 24.3 percent, radiologist jobs (which are part of the larger medical field) are anticipated to rise by 19.5 percent, accountant and auditor positions are projected to expand by 19.5 percent, architectural occupations are projected to expand by 17.3 percent and commercial and industrial designer jobs are projected to grow by 14.7 percent.
How does offshoring lead to better jobs? The McKinsey Global Institute estimates two-thirds of economic benefits from outsourcing services to India flow back here. Firms that outsource generate higher profits, have more capital to invest in R&D, become more globally competitive and are better positioned to expand sales worldwide—creating higher-paid jobs.
In March 2004, The Information Technology Association of America (ITAA), a leading U.S. trade association for the IT industry, released The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry. According to ITAA, the study conclusively demonstrates that worldwide sourcing of computer software and services increases the number of U.S. jobs, improves real wages for American workers, and pushes the U.S. economy to perform at a higher level, thereby generating many other economic benefits.
Global Insight, a leading economic analysis, forecasting and financial information company, was commissioned by ITAA to conduct the study. The Global Insight research team was led by Global Insight Chief Economist Dr. Nariman Behravesh, one of the world’s most accurate economic forecasters. Nobel Prize winning economist Dr. Lawrence R. Klein, the founder of Wharton Econometric Forecasting Associates (WEFA), Inc. and a Global Insight associate, also made significant contributions to the study.
“We have long held the position that global sourcing creates more jobs and higher real wages for American workers,” said ITAA President Harris N. Miller. “Now we have the data that prove it. Far from being an economic tsunami that washes away domestic IT employment as some believe, global sourcing helps companies become more productive and competitive. The savings produced through worldwide sourcing are invested in new products and services, in new market expansion, and, most importantly, in creating new jobs and increasing real wages for American workers. This research replaces fear with sound economic analysis, allowing for an informed approach to the global marketplace.”
The ITAA/Global Insight study found:
The study also found that raising barriers to worldwide sourcing would adversely impact U.S. workers and U.S. firms. If all global sourcing of software and IT services terminated completely, the report said, the impact would slow the U.S. economy and reduce the number of new jobs available to American workers. While worldwide sourcing is expected to increase jobs and wages, Miller said much needs to be done to address the challenges of those workers displaced by this economic shift. The report offers a range of recommendations to achieve this.
Catherine Mann of the Institute for International Economics says offshoring of computer manufacturing resulted in a 10 to 30 percent drop in computer costs. In turn, sales of PCs soared. This led to a rapid rise in U.S. productivity and added $230 billion in cumulative GDP from 1995 through 2002. The result: many new jobs emerged, far exceeding those lost to outsourcing.
If applied to select medical services and other fields, offshoring could reduce costs and generate new waves of innovation, resulting in better jobs not yet imagined. As Ross Perot’s early 1990s forecast of a “giant sucking sound” proved incorrect, so is the fear of offshoring. In reality, the U.S. service sector will significantly expand. And since the industry has become more sophisticated, average hourly earnings for service production workers have already caught up to those in manufacturing. Nevertheless, service jobs that require left-brained routine quantitative functions, not intuitive or creative problem solving skills, will increasingly be automated or moved offshore. As a result, those jobs that are lost will increasingly be featured on prime-time news and create the false impression that the American service industry, as a whole, is moving to India.
In the end, these false impressions can be powerful. According to the National Foundation for American Policy, a Washington, D.C. research organization, as of March 17, 2005, there were 112 bills in 40 states designed to restrict outsourcing. On the same date in 2004, there were 107 bills in 33 states. If successful, in the long run, these bills will harm the workers they are intended to help. Stated in the 2005 McKinsey Global Institute report, How Offshoring of Services Could Benefit France, “A new dynamic is emerging in the economic sectors exposed to global competition: early movers in offshoring improve their cost position and boost their market share, creating new jobs in the process. Companies who resist the trend will see increasingly unfavorable cost positions that erode market share and eventually end in job destruction. This is why adopting protectionist policies to stop companies from offshoring would be a mistake. Offshoring is a powerful way for companies to reduce their costs and improve the quality and kinds of products they offer consumers, allowing them to invest in the next generation of technology and create the jobs of tomorrow.”
As business becomes more competitive, companies increasingly will focus on their core strengths and contract out functions that can be provided more efficiently by others. Many of these functions will be offshored. But more will be outsourced within the United States. This provides many opportunities for regions with various advantages. Take Western New York for example. The State University of New York at Buffalo, as well as many other local universities and colleges, graduate tremendous numbers of very well educated students each year. In the Western New York area, housing and corporate real estate costs are among the lowest in the country. The region also has one of the largest international trade and transportation infrastructures, and the quality of life is top notch. According to Jeff Belt, president of Acen, a Buffalo, N.Y.-based software development and web hosting company, “The cost to operate a software firm in Western New York is 48 percent less than in metropolitan Seattle, and all the necessary talent and infrastructure are here.”
Based on these realities, Western New York is naturally suited to attract culturally-sensitive, high-skilled back office operations that require elevated levels of quality control. The target: corporations that operate skilled back office service operations (knowledge-intensive jobs not requiring face-to-face contact) currently located in high-cost metropolitan areas such as New York City, Boston and Washington, D.C. Based on Western New York’s advantages that most regions cannot match, it has an opportunity to brand itself as “America’s insourcing center” and position itself as the high-end “American Bangalore,” free of cultural disconnects, long-distance management problems and political uncertainties caused by Indian-Pakistan tensions and global terrorism. Plus, Western New York offers Manhattan-based financial firms a well-suited data back-up location that exceeds the 200-300 mile distance recommended by the federal government’s interagency white paper on strengthening the resilience of the U.S. financial system. Like so many other U.S. regions, however, Western New York needs to better adapt to new global economic realities in order to seize valuable opportunities within its reach.
International trade enables producers of goods and services to move beyond the U.S. market of 296 million people and sell to the world market of 6.4 billion. This is very good news, since exports support millions of higher-paying U.S. jobs, strengthen companies and farms, and improve our tax base, while sending export revenue to local communities through restaurants, retail stores, etc. In 1950, trade accounted for less than 5.5 percent of U.S. economic growth. Today, it has become an integral part of everyday life, accounting for 25 percent of economic growth in 2004.
As stated earlier, in 2005 Gary Clyde Hufbauer of the Institute for International Economics, said trade and globalization have generated an increase in U.S. income of approximately $1 trillion annually, measured in 2003 dollars. This translates into an income gain of about $10,000 for the average American household per year. Further liberalization that achieves global free trade and investment, he said, could produce another $500 billion in U.S. income annually or $5,000 per household each year. And a May 2005 OECD report estimates reforms that enhance market competition, reduce tariff barriers and ease restrictions on FDI would boost GDP per capita 1 to 3 percent in the United States, 2 to 3.5 percent in the European Union, and an average of 1.25 to 3 percent in OECD member countries.
According to Howard Lewis III and J. David Richardson’s report Why Global Commitment Really Matters!, companies that export grow faster and fail less often than companies that do not. And their workers and communities are better off. According to this report, published in October 2001 by the Institute for International Economics, U.S. exporting firms experience 2 to 4 percentage points faster annual growth in employment than their non-exporting counterparts.
But there’s more to the story. Exporting firms also offer better opportunities for advancement, expand their annual total sales about 0.6 to 1.3 percent faster, and are nearly 8.5 percent less likely to go out of business. These gains are not dependent on any specific time period or export volume. Furthermore, sales abroad spread risk should the domestic market enter a period of slow growth or recession.
According to Why Global Commitment Really Matters!, workers employed in exporting firms have better-paying jobs. For example, blue-collar worker earnings in exporting firms are 13 percent higher than those in non-exporting plants. Wages are 23 percent higher when comparing large plants and 9 percent higher when comparing small plants. White-collar employees also earn more—18 percent more than their non-exporting counterparts. Furthermore, the benefits for all workers at exporting plants are 37 percent higher and include improved medical insurance and paid leave.
Why Exports Matter: More!, a report by J. David Richardson and Karin Rindal published by the Institute for International Economics and The Manufacturers Institute, states that less skilled workers also earn more at exporting plants. How does globalization impact the wages of workers in non-trade related jobs? According to the International Monetary Fund, “Nearly all research finds only a modest effect of international trade on wages and income inequality.” Note: since the late 1970s, the wages of less skilled American workers have decreased relative to those of more skilled workers. Similar patterns are occurring in the United Kingdom. In contrast, countries with relatively rigid wages, such as France, Germany and Italy, have experienced higher unemployment rates.
According to Lewis and Richardson’s report, U.S. companies that have investments abroad use more advanced manufacturing technology than U.S. non-multinationals or U.S. firms without investments abroad. And this has led to greater labor productivity. In fact, worker productivity is 11 percent higher in large U.S. multinationals and 33 percent higher in small ones as compared to their U.S. counterparts not invested abroad.
In addition, average annual earnings of employees at large U.S. multinationals abroad are 18 percent higher than at their U.S. non-multinational counterparts; at small multinationals this number increases to 25 percent. Even though analysis indicates difficulty in separating out white-collar job gains at American-owned multinationals, blue-collar job gains are significant.
On the other hand, U.S companies that are recipients of foreign direct investment also perform better. According to the report, U.S. plants that are recipients of foreign direct investment employ workers with 19 percent higher productivity, provide them with more machinery and equipment, and use more cutting-edge technology than their counterparts not globally engaged. Also noteworthy, these benefits accrue at plants with an equity stake as low as 10 percent and as high as 100 percent. Overall, the report says blue- and white-collar jobs at these plants pay 7 and 2.5 percent more, respectively, when comparing plant size, industry and location.
International trade sometimes does cause employment to increase in one sector and decrease in another. But so do many other factors. Exaggerated fears of massive job losses due to imports are misplaced. Contrary to some claims, only a very small percentage of American jobs are ever put at risk from imports. And surprising to many, U.S. employment has been strong during periods of elevated imports.
Stated by the Progressive Policy Institute in June 2005, “What role do trade and the global economy play in job loss? Perhaps less than many people assume. Definitions of ‘trade-related’ job loss are unclear, reliable statistics are scarce, and the statistics which do emerge are rarely put in the context of total layoffs. But research seems to show that at most they account for about 5 percent of layoffs, and more likely between 2 percent and 3 percent.”
According to the Bureau of Labor Statistics payroll data, which does not include farm workers and some self-employed workers, in June 2005 goods-producing industries (manufacturing, mining, logging and construction) accounted for 22 million workers; service-providing industries accounted for the remaining 111 million workers. The workers not in the manufacturing sector are in industries that by their nature do not produce tradable goods or services, or where imports account for a very small to nonexistent share of domestic supply, according to Daniel Griswold, director of the CATO Institute’s Center for Trade Policy Studies. And in the manufacturing sector, only a small number of workers are in industries considered import-sensitive.
In 2004, agricultural workers numbered 2.2 million and represented approximately 1.6 percent of total U.S. employment, as reported by the U.S. Department of Labor. According to Griswold, some agricultural sectors (such as dairy products, sugar and peanuts) are more vulnerable than others (the larger export-oriented sectors such as wheat, corn and soybeans). “Even in farm sectors most vulnerable to import competition,” said Griswold, “the potential job losses are minuscule in relation to the overall U.S. labor force.”
Contrary to some claims, imports are good for the economy and consumers. Imports offer American consumers greater choices, a wider range of quality and access to lower-cost goods and services. They create competition, forcing domestic producers to improve value by increasing quality and/or by reducing costs. And since imports allow the American family to purchase more goods for less money—stretching the dollar—more disposable income is available for education, health care, mortgages, vacations, etc. Imports also help keep inflation down, which is one of the most important factors in raising our standard of living.
“Three out of four families living below the poverty line in America today own a washing machine and at least one car,” observe John Micklethwait and Adrian Wooldridge, authors of A Future Perfect. “Ninety-seven percent own a television; three out of four have a VCR. Thanks to all that terrible competition, many gadgets are much more affordable, particularly in terms of the number of work hours needed to acquire them.”
Imports not only afford American families a higher standard of living—a primary economic goal—but through the availability of lower-cost imported components and materials, U.S. producers are more competitive, which result in enormous benefits.
In 2004, more than half the $1.47 trillion in goods Americans imported were capital goods ($344 billion) and industrial supplies and materials ($412 billion). As stated by Daniel Griswold: “Such imports as petroleum, raw materials, steel and semiconductors are used directly by American producers to lower the cost of their final products. The lower costs in turn lead to increased sales at home and abroad, and in many cases, higher employment within the industry.”
According to the WTO, “Imports expand the range of final products and services that are made by domestic producers by increasing the range of technologies they can use. When mobile telephone equipment became available, services sprang up even in the countries that did not make the equipment. Additionally, because imports offer unique capabilities at attractive prices, they are proven to enhance worker productivity. And higher productivity leads to a host of benefits.”
For over three decades, the U.S. service sector has generated a trade surplus that has consistently reduced the trade deficit. For example, in 2004, U.S. services exports of $338.6 billion decreased the U.S. trade deficit by almost $50 billion, and the service export figure is probably severely underreported. Since 1980, U.S. service exports have grown almost twice as quickly as goods exports.
But more importantly, tremendous benefits are currently derived from—and huge potential is offered by—the service sector in terms of economic growth, personal income, employment and exports. This fact is not widely acknowledged. It is becoming increasingly likely that the telecommunications/digital infrastructure that is making the global sourcing of services possible today is the same infrastructure that will significantly support an even greater boost in service exports.
Major U.S. service exports include computer and data processing; wholesale, financial, transportation and communication services; architectural, engineering and surveying services; accounting, research and management services; and motion pictures. And it is anticipated that the export of business, professional and technical services (accounting, advertising, engineering, franchising, consulting, public relations, testing and training) will increase rapidly over the next several years.
When the delivery of services requires face-to-face contact, it is necessary to be present in the foreign market. To accomplish this, many U.S. companies sell their services through U.S.-owned foreign affiliates. U.S.-owned employment agencies operating in Europe, for example, interview hundreds of European candidates each day for local jobs. U.S.-owned insurance affiliates operating abroad, a fast-growing industry, account for a very large share of total U.S.-owned affiliate transactions.
When some people envision the service sector, they think of employees flipping hamburgers. 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 same 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 clearly caught up to the manufacturing sector.
With the recent introduction and availability of new and inexpensive technology—led by telecommunications, computers and the internet—millions of people and companies worldwide now have the ability to purchase more services from the United States. As a result, the U.S. service sector will continue to grow. Note: the number of workers employed in U.S. service producing industries has steadily climbed. In June 2005, it reached 111.4 million or 83.4 percent of total payroll employment.
While the majority of trade in the United States is done by large companies, it is no secret that their small and medium sized cousins (SMEs hereafter) are also eager to take advantage of the many opportunities offered by international activities. One defining aspect of SMEs is that their operations are generally located in one state, though they may have activities in several.
SMEs’ particular location within the U.S. immediately takes on significance for one simple reason. When it comes to international trade and trade assistance, no two states are alike. Few SMEs take these regional facts into consideration but could benefit greatly by learning more about the international activities and programs of their home states.
The typical SME has ample national information available to it. It is easy to find government sources that together provide a wide array of domestic national and state information, from wages and employment to income and sales. It is also pretty simple to find U.S. international information. The government publishes a wide variety of data and analysis about immigration, imports, exports, capital flows, exchange rates, and more.
But what is more difficult is locating information about state international transactions. It is tedious, costly, or next to impossible to find information about many of the above international transactions for a given state or group of states.
How many workers produce exports in Louisiana? How many foreign born workers in Florida are from Argentina and Brazil? What is the value of the business services exported from New York? Can I get an accurate accounting of agricultural exports in Kansas? How much business services does North Carolina import?
Why would a company want these kinds of state-oriented data on international transactions? There are several reasons why any company should be interested. First, international trade is becoming more important. If other companies in your state are engaged in more international business, then you might want to know why.
Second, international threats and opportunities are a constant source of change in the business environment. Because of the special supply chain that typifies your state, the impacts in your area may differ significantly from those in other states. To be well informed, you need to know what is going on around you.
Third, state governments have international policy tools that complement or sometimes may substitute or compete with national programs. A business doing international deals needs to know what its state is doing to promote trade.
Fourth, not all states are equal when it comes to assisting internationally-minded businesses. Knowing what other states do is important. A company that sees better support and opportunities in other states can lobby its state government, and failing a good resolution, can always locate to a more supportive place.
Knowing what you can and can’t learn about a state’s international transactions is equally important. You can find information about a state’s manufacturing exports relatively easily. The U.S. Census publishes state level information for each state’s manufactured exports. This data is very rich, with breakdowns by country destination and industry. You can get monthly or quarterly data, and you can choose between data that is organized by North American International Classification (formerly Standard Industrial Code, SIC Code) industries or by Schedule B Commodity codes.
These sources of data for a state’s manufactured exports can be useful for seeing growth patterns in exports of, for example, pharmaceuticals. You can see how fast your state’s pharmaceuticals exports are growing by country. And you can compare your state’s growth to another state or to the nation.
One weakness in this data is its inability to measure “indirect” exports. For example, if you live in a state that produces steering wheels and some of those steering wheels are assembled into automobiles in another state, you might never know how many of your steering wheels are being shipped to foreign countries. Your steering wheels are indirect exports, but the government statistics are silent about that.
A second problem with the measurement of manufactured exports at state level is that some goods get commingled with others at ports. This problem is especially significant for very homogeneous products that are often stored at ports before being shipped. This means that these products lose their “state identities” and gain the identity of the state of the port of exit. This problem arises because the last party to ship the goods incorrectly completes a form called a Shippers Export Declaration Form (SED).
This form asks for the address of the shipper, as well as the state from which the majority of the value of the item was produced. The last shipper may simply put his own address and state on this form. Thus, states that have a major port often get credited for more exports than they really produce. Other states are credited less.
This problem is especially important for agricultural products. For example, while the U.S. Census Bureau reported Indiana agricultural exports in 2000 to be $289 million, our estimates suggest a range of between $700 million and $3 billion.
We all know a preponderance of U.S. employment and a majority of output are classified as services. Plus, manufacturing has become a smaller share of U.S. business for many decades. While most U.S. trade is in manufactured goods, it is also true that trade in services is growing—and at a much faster pace than manufactured goods.
Although we have a large trade deficit in goods, the U.S. has a surplus in services trade. As such, the whole issue of outsourcing relates to the importing or exporting of business services. But the truth is that we know little about the state origins of business and personal services exports.
Even though the U.S. government publishes data at the national level, it publishes no information about the state breakdown. This means we are in virtual information darkness when a state’s firms sell any of the following services to foreigners: shipping, travel, insurance, banking, recreation, entertainment warehousing, health, education and various specific business services (e.g. accounting, consulting, drafting).
If there are regional patterns of change that present international opportunities or threats to specific states, we are unable to find out about them through regularly published official data.
The U.S. government used to publish periodic special reports about exports and export-related employment in states. These reports, based on the Census of Manufacturing, were discontinued several years ago.
By studying the production and sales relations of many companies, the Census Department was able to identify the relationship between export sales and export employment. They also made separate estimates of direct manufacturing employment and supporting employment, where the latter included estimates of employment necessary to support the export of a directly exported good (e.g. shipping, warehousing, advertising).
Discontinuing these reports means that anyone interested in understanding more about how much of the state’s labor force is involved with an export supply chain must do the original work himself.
If you are interested in the number of immigrants, foreign-born persons or U.S. subsidiaries of foreign companies in your state, this information is available, but well concealed in various places in the U.S. Department of Labor and U.S. Department of Commerce. But what you can’t find anywhere are any state breakdown of imports.
The U.S. government makes no attempt to track and publish where goods or services go when they enter the U.S. If, for example, you are sensing more foreign competition for a particular local industry in your state, you have to use your own research time and effort to find out where it is coming from.
The upshot of this: we identify with states. We mostly live and work in one state, and likely compete in several states. But as of today, we have very little regularly published information about the international economic activities and international policies of our own state or others. We need more information to make sound business decisions. And we need to know if our state governments have the best knowledge about current international changes and opportunities. This kind of information will help us to know if our states are doing the best they can to offer business services and assistance that will support the most conducive environment for international growth and change.
In today’s politically-charged global environment, U.S. companies operating abroad are scrutinized more than ever. In fact, some international business executives say they have been unfairly criticized and targeted by foreign organizations unhappy with various U.S. policies.
Consequently, U.S. direct investment abroad—and the impact of that investment—have become a lightning rod for some groups with ill will toward America. But a closer look at U.S. investment abroad and its impact reveals many benefits to host countries.
In 2003, the U.S. foreign direct investment (FDI) position abroad, measured on a cumulative historical-cost basis, reached almost $1.8 trillion. But some anti-American organizations would have you believe that U.S. investment in developing countries is harmful to host country workers and environments. A careful look at the record indicates this is not true.
Although exceptions exist, American manufacturers who invest in developing countries typically offer higher wages and better working conditions than do domestic companies. This makes jobs at U.S. facilities highly prized, and over time leads to improved worker protection at all levels.
Through American operating standards and business practices, U.S. companies often serve as agents of change, charting paths for other foreign and domestic companies to follow. This strategy, which is good for business, results in greater employee loyalty, less absenteeism, higher morale and increased productivity.
Anti-American organizations, as well as anti-trade and business groups, promulgate the notion that U.S. manufacturers investing abroad typically seek countries with cheap labor costs and weak environmental regulations in order to gain a competitive advantage.
Their argument is based on the notion that weak environmental and worker standards give producers in poor countries a significant cost advantage. They also theorize that this puts pressure on other countries to lower their standards in order to compete, prompting a “race to the bottom.”
If this were correct, investment would be flowing to underdeveloped countries with the poorest labor and environmental records. In reality, the opposite is true.
Developing countries tend to attract only a small portion of America’s foreign direct investment. For example, in 2001, 94 percent of U.S. manufacturing investment abroad was directed in high-wage countries. Political stability, education and productivity levels, communications and transportation infrastructure, the rule of law, proximity to market, and the ability to repatriate profits are the most important determinants of capital flows.
Over the last several years, environmental issues have received a great deal of attention both in the United States and abroad. Global warming, climate change and ozone depletion, among other concerns, are increasingly raising eyebrows.
In addition to the negative impact on the environment, ignoring these concerns can have a disastrous affect on a company’s relationship with its host community.
U.S. companies understand this well and realize that satisfying foreign environmental standards—that may regulate toxic releases, compliance with air permits, hazardous waste management, and worker health and safety practices—is essential.
In fact, U.S. firms often go beyond what’s required, take steps involving local recycling, and implement pollution reducing innovations and techniques. In turn, this generates good will toward U.S. companies in their host country communities.
In reality, little incentive exists to establish facilities in countries with weak standards. Plus, complying with environmental regulations typically accounts for less than 1 percent of production costs of industries in Western countries. In addition, good corporate citizenship is increasingly receiving favorable attention from institutional investors. They are well aware of the financial damages caused by companies with poor labor and environmental records.
U.S. corporate good works, which often focus on philanthropy and community involvement, span a variety of initiatives and activities. These works include supporting local infrastructure development, promoting health care and education, and advancing agricultural practices.
Beginning in 1991, Procter & Gamble, for example, invested millions of dollars in a Czech Republic consumer products company that produced detergent and liquid cleaners. By applying P & G’s worldwide environmental standards, the facility was able to reduce boiler emissions by 99 percent and solid waste by nearly 6,000 metric tons.
In addition to environmental improvements, P & G introduced a competitive compensation program and unique employee benefits, such as loans to renovate apartments and houses, supplementary income payments during illness, maternity leave, and language studies.
P & G also annually donated considerable funds to the development of local education, health care, environmental protection and social institutions. So impressed with these practices, Czech Republic President Vaclav Havel said P & G “could serve as a model for other investors.”
Although not all U.S. firms operating abroad subscribe to P & G’s high standards, most companies believe that good corporate citizenship is simply good business, and that it encourages a long and prosperous relationship with the host government, workers and consumers.
Nevertheless, Americans working and traveling abroad often become the targets of anger directed toward the United States or its allies. And American FDI, which enormously benefits host country workers and environments, unfortunately is a target on the global public relations front. But in the end, good corporate activity pays off in terms of good will and business success. And that is something the world will always need.
Many Republican and Democratic politicians fear offshoring will result in fewer good jobs for American workers. This is understandable since some activities include the movement of knowledge-intensive services to India and other countries with educated, less expensive, English-speaking labor pools.
But careful analysis reveals that worldwide sourcing — made possible by new technologies that digitize and cheaply transmit information around the world — provides real benefits.
History tells us that new technologies and improved business strategies displace jobs. For example, automobile workers replaced buggy makers, and ATMs, voice mail and voice recognition software eliminated bank teller, receptionist and medical transcription jobs.
Consider this. The U.S. economy loses an average of 31 million jobs annually. But new jobs are created even faster. The proof: America generated 60 million net jobs since 1970. And according to the Labor Department, the U.S. will generate another 21.3 million net jobs from 2002 through 2012.
New technologies, innovation and higher productivity, the primary causes of job churn, increase wages and improve living standards. In turn, new industries and higher-skilled jobs emerge. Thus, Forrester Research’s estimate of 3.3 million service jobs moving offshore by 2015 represents a fraction of job churn.
Higher-tech jobs most likely to be outsourced, like computer programming and software design, are projected actually to increase here at home, according to the Labor Department. What’s more, by 2012, all U.S. computer-related occupations are estimated to grow by 15 to 57 percent. Lower-tech jobs prone to outsourcing, such as bookkeeping and customer service, also are projected to increase in the U.S.
How does offshoring lead to better jobs? The McKinsey Global Institute estimates two-thirds of economic benefits from outsourcing services to India flow back here. Firms that outsource generate higher profits, have more capital to invest in R&D, become more globally competitive and are better positioned to expand sales worldwide — creating higher-paid jobs.
Catherine Mann of the Institute for International Economics says offshoring of computer manufacturing resulted in a 10 to 30 percent drop in computer costs. In turn, sales of PCs soared. This led to a rapid rise in U.S. productivity and added $230 billion in cumulative GDP from 1995 through 2002. The result: Many new jobs emerged, far exceeding those lost to outsourcing.
If applied to select medical services and other fields, offshoring could reduce costs and generate new waves of innovation, resulting in better jobs not yet imagined.
Fear of a "giant sucking sound" is unfounded. In reality, the U.S. service sector will significantly expand. And since the industry has become more sophisticated, average hourly earnings for service production workers have already caught up to those in manufacturing.
In 1940, 9.5 million U.S. workers were employed on farms. By 2003, new technologies reduced this number to 2.3 million. And U.S. agricultural output is tremendously higher. America did not "lose" 7.2 million farm jobs; they shifted to emerging industries.
Job losses, which should not be taken lightly, cause anxiety and provoke various responses. In the early 19th century, the English Luddites attempted to destroy textile machines because they replaced weavers. Something similar is happening today. Numerous pieces of federal and state legislation have emerged that, if enacted, will penalize companies that outsource.
Although our policymakers have good intentions, their protectionist actions could disrupt Joseph Schumpeter’s process of "creative destruction": where the new destroys the old. This process, which promotes job creation, produced almost 1.2 million net jobs from January through May 2004, albeit slowly due to recovery from recession, terrorism and war.
The American workforce is the most productive and flexible in the world. As new knowledge industries and job opportunities emerge, it’s important to give our workers the tools they need to be competitive. Policies supporting life-long learning, not protectionism, will help prepare our workers for the challenges ahead.
For many Hudson Valley-based businesses, a U.S. economic slowdown will mean fewer domestic sales, hurting local companies and workers. However, through an effective export strategy, local firms and workers can shelter themselves from economic hardship.
Additionally, this will generate high-paying jobs, strengthen local companies and farms, and improve the region’s tax base — while sending export revenue to local restaurants, retail stores, etc. However, in order for Hudson Valley exporters to sell more goods and services abroad, Congress needs to forge new trade agreements that further open foreign markets.
U.S. exports account for almost one-third of real U.S. economic growth and a very large portion of New York’s economic development. Consequently, the income of local workers and farmers, and the growth prospects of New York-based businesses are pegged to international trade.
These are the key findings released on March 9th in a new Business Roundtable report, "International Trade Benefits New York," that I authored. Plus, the report reveals:
The New York City metro area ranked within the top 1% of largest U.S. metro areas. Stated by Governor George E. Pataki, "New York has created a business-friendly environment by cutting taxes, controlling spending and eliminating red tape. This strategy puts New York companies in a very strong position to compete globally, as well as positions New York State as an attractive location for international investment. Our aggressive economic agenda reinforces the Empire State as the center of global business marketplace.”
Numerous local businesses are succeeding internationally, but more needs to be done. For almost three decades, the U.S. service trade surplus has consistently reduced the trade deficit. In 1999 alone, it decreased the trade deficit by 25%. And since 1980, U.S. exports of services have grown 130% faster than exports of goods.
New York’s private service-producing industries accounted for 75% of total gross state product in 1998, a larger percentage than any other state. And in the New York City metro area, 90% of non-farm workers are employed in the service sector — a higher percentage than any other state area. To improve the local economy, Hudson Valley-based companies need greater access to both foreign goods and service markets. To achieve this, we need Congress to forge new trade agreements that further open foreign markets.
Under the North American Free Trade Agreement (NAFTA), Mexican and Canadian markets have become much more important to New York State producers and workers.
Compared to other states, New York ranks fourth from the bottom in terms of economic growth. Measured in gross state product (GSP), the average economic growth rose only 2.7% annually from 1992 through 1998, well below the nation’s average annual growth rate of 3.9%, according to the U.S. Department of Commerce.
In the manufacturing sector, New York’s growth registered 0.7%, significantly lower than the national rate of 4.9%. However, in New York’s finance, insurance and real estate industry, average annual gains during the period of 1992 through 1998 were 4.6%, higher than the national rate of 3.6%.
Although the state as a whole has performed poorly in terms of economic growth, the downstate region has performed well. In fact, in September 2000, the New York-New Jersey Port Authority said their region was “one of the world’s most vibrant economies,” and predicted that economic growth would continue.
Port Authority Executive Director Robert E. Boyle said, “The New York-New Jersey region closed out the 20th century with an economic boom. Not only did regional employment reach an historic high, but for the first time in nearly 20 years the region outpaced the gains of the national economy.” And the agency forecasts that over the next few years, economic growth in the region will match national growth for the first time in recent memory.
From December 1998 through December 1999, the number of New York State jobs increased by 1.8%, according to the Public Policy Institute. Broken down: New York City’s job count grew by 1.9%, while Long Island and northern New York City suburbs grew by 1.9% and 2.2%, respectively. However, Upstate jobs grew by only 1.6%, with the Buffalo-Niagara, Rochester, and Syracuse regions registering 0.2%, 0.7%, and 2.4% growth, respectively.
How can New York State, especially Upstate, generate additional economic growth that results in higher-paying jobs? A sound strategy is to seize opportunities presented by globalization through exports of goods and services. Since New York State is extremely competitive internationally, it makes sense to promote overseas sales to a greater extent. Since fully 96% of the world’s customers for goods and services live outside the United States, and many domestic industries now are saturated, New Yorkers need to find new customers in order to maintain existing jobs and create new ones.
From 1993 through 1998, the Buffalo-Niagara metropolitan area was well within the top quarter of fastest growing and largest merchandise export metro areas in the country. Not surprisingly, the prosperity of the Buffalo-Niagara area, like other regions in New York State, is closely tied to exports. And the highest employment sectors in the Buffalo-Niagara area in 1999 were also among the state’s top merchandise export industries.
As of June 2000, the electronic industry employed 11,300 workers in the Buffalo-Niagara metro area (defined by the New York State Department of Labor as Erie and Niagara counties). This represented 13% of area manufacturing workers — comprising the area’s largest manufacturing sector. This high-tech industry is also very competitive internationally, and as such, is New York’s fifth largest merchandise export industry. Industrial machinery, transportation equipment, and the food and kindred product sectors also are among the largest manufacturing employers in the Buffalo-Niagara metro area — and not surprisingly are New York State’s top merchandise export sectors. As one can see, the export growth of these Buffalo-Niagara metro area industries is vital to local employment.
(Industry Rank by Employment: Industry: New York State Merchandise Export Rank)
Source: U.S. Dept. of Commerce
In July 2000, the Buffalo-Niagara metro area’s unemployment rate was 4.9%, higher than New York State’s overall rate of 4.4% and the nation’s rate of 4.2%, according to the New York State Department of Labor. And when it came to personal income, the region lagged well behind the state. From 1997 through 1998, personal income per capita rose by 4.1% in Erie County and 3.1% in Niagara County, but increased 5.2% state-wide, and 5.9% nationally, according to the Bureau of Economic Analysis.
In order to increase employment in large and higher technology manufacturing sectors (which will lead to higher revenues, benefiting local workers and companies, and the tax base) policies need to be implemented to encourage local electronic, industrial machinery, and transportation equipment manufacturers to further increase exports. Importantly, this will help the Buffalo-Niagara metro area catch up and enjoy the levels of growth achieved state-wide and nationally.
In 1998, the Rochester metropolitan area ranked in the top 12% of the largest merchandise export communities in the country, but 146th out of 253 in terms of merchandise export growth during the period of 1993 through 1998. (Note: export growth is likely to be slower for the largest exporting communities since significant additional growth requires exceptionally large increases in exports.)
Like the Buffalo-Niagara region, employment in the Rochester metro area (defined by the New York State Department of Labor as Genesee, Livingston, Monroe, Ontario, Orleans, and Wayne counties) is tied to the state’s largest export sectors. As of June 2000, the Rochester area’s scientific and measuring instruments sector was the area’s largest manufacturing employer, representing 40% of area workers. This was followed by the industrial machinery and electronic sectors. Interestingly, these sectors also produce the state’s top exports. It is clear that the export success of these sectors will have a direct impact on local employment.
The Rochester region’s unemployment rate was 3.5% in July 2000, lower than the state and national averages, according to the New York State Department of Labor. However, the counties comprising the region all registered lower personal income growth rates on a per capita basis than the state, 5.2%, and the nation, 5.9%, during the period 1997 – 1998. According to the Bureau of Economic Analysis, Genesee County registered a 2.4% increase in personal income growth, Livingston, 2.8%, Monroe, 3.9%, Ontario, 3%, Orleans, 1.5%, and Wayne, 2.6%. Although unemployment is a bright spot, personal income can be improved. Since export-related jobs pay higher wages than the national average, more focus needs to be placed on local companies achieving export success.
In 1998, the Syracuse metropolitan area ranked in the top 31% of the largest merchandise export communities in the country. Its merchandise export growth rate, however, has been poor, ranking 219th out of 253 U.S. metro areas from 1993 through 1998.
A look at the Syracuse metro area (defined by the New York State Department of Labor to include Cayuga, Madison, Onondaga, and Oswego counties) reveals a similar correlation between the largest employment sectors and top manufacturing export industries as seen in the Buffalo-Niagara and Rochester regions. As of June 2000, the industrial machinery sector was the largest regional manufacturing employer, representing 16% of manufacturing employees. This was followed by the electronic equipment, transportation equipment, and food and kindred products sectors.
The Syracuse region’s unemployment rate was 3.5% in July 2000, lower than the state and national average, according to the New York State Department of Labor. However, the region’s counties registered per capita personal income growth lower than the state and nation during the period of 1997 – 1998. The county of Cayuga registered 3.3%, Madison, 4%, Onondaga, 4.7%, and Oswego, 2.8%, according to the Bureau of Economic Analysis. Like the Buffalo-Niagara and Rochester areas, to increase personal income for workers, more emphasis should be placed on the international success of local companies.
The New York City metropolitan area ranked as the third largest metro merchandise exporter out of 253 U.S. metro areas in 1998. If unavailable local service export data were included, the New York City region likely would rank as the largest U.S. metro area exporter.
The employment composition in the New York City metro area is somewhat different than the rest of the state due to the high concentration of service industries and the international level of competitiveness it maintains. According to the New York State Labor Department, the New York metro area includes the Bronx, Kings, New York (Manhattan), Queens, and Richmond counties.
As of June 2000, the New York metro area’s third (chemicals), fourth (food and kindred products), and fifth (electronic) largest manufacturing employment sectors ranked among the state’s top seven export categories. However, the area’s largest manufacturing employment sector, printing and publishing, represented 30% of area manufacturing workers. This sector was followed by apparel products, which represented 25% of manufacturing workers.
(Industry Rank by Employment: Industry : New York State Merchandise Export Rank)
As a center for the nation’s leading book and magazine publishers, as well as the entertainment industry, New York City benefits significantly from royalties and license fees, categorized under service exports, not merchandise. For example, AOL Time Warner’s New York City headquarters employs 12,700 people, ranking sixth among the city’s top employers, according to Crain’s New York Business. The company owns the rights to tens of thousands of movies, television shows, magazines, and books. In 1999, this contributed to U.S. royalties and licensing fees, which accounted for U.S. exports of $36.5 billion and imports of $13.2 billion, according to U.S. International Services: Cross-Border Trade in 1999 and Sales Through Affiliates in 1998.
Expanded to include the New York primary metropolitan statistical area (PMSA), which comprises the metro area plus Putnam, Rockland, and Westchester counties, the export picture looks very similar to the New York City metro area. As of July 2000, the unemployment rate for the New York City metro area was 5.8%. Expanded to include the entire eight-county PMSA, the rate edged down to 5.4%, still higher than the state and national rate, according to the New York State Department of Labor.
In terms of per capita personal income growth, the Bronx registered an increase of 3.4%, Kings, 3.5%, New York, 7.5%, Queens, 5.9%, Richmond, 4.4%, Putnam, 5.8%, Rockland, 7.5%, and Westchester, 5.1%, during the 1997 -1998 period, according to the Bureau of Economic Analysis.
Long Island, which comprises Nassau and Suffolk counties, ranked in the top 12% of the largest metro merchandise exporters, one place after Rochester, New York. In terms of merchandise export growth, Long Island came in at 113th.
In the counties of Nassau and Suffolk, as of June 2000, the electronic sector employed the most manufacturing workers, 15%, followed by printing and publishing, chemicals and allied products, and instruments and related products. Long Island has created an attractive environment for numerous small and mid-size high-tech firms that employ thousands of engineers and scientists. As a result, a shift has occurred from a mixed manufacturing economy to a primarily high-value added services economy.
1st: Electronic: 5
2nd: Printing and Publishing: 9
3rd: Chemicals: 6
4th: Instruments: 4
5th: Fabricated Metals: 10
As of July 2000, the unemployment rate of Long Island was 3.1%, lower than the state and national rate. And, in terms of per capita personal income growth, Nassau and Suffolk registered increases of 4.3% and 5.2%, respectively, during the 1997 -1998 period, according to the Bureau of Economic Analysis.
The Port Authority of New York and New Jersey reported in September 2000 that “the service sector has been the ‘star performer’ in the regional economy. Growth in service jobs has averaged 3.9% in each of the past three years. The sector is responsible for more than 600,000 regional jobs since 1992.”
It is no surprise that the New York City metro area and the expanded New York City PMSA region employ a larger percentage of workers in the service sector than Upstate areas. As of June 2000, the New York City PMSA employed 90% of its nonagricultural workforce in the service sector. This was followed by Long Island, 86%, Syracuse, 81%, Buffalo-Niagara, 80%, and Rochester, 76%.
When it comes to finance, no region in the United States plays a larger role than New York City’s financial district. The sector provides a large number of jobs to New Yorkers — from Long Island to the five boroughs to the northern suburbs. Of the top 25 employers in New York City, 12 are in the financial services sector. This not only significantly contributes to the region’s economic success, it also helped drive the U.S. service trade surplus of which $10.3 billion (exports less imports) is derived from financial service trade, and $16.6 billion (exports less imports) is generated from business, professional, and technical service sectors.
U.S. financial service exports increased 24% from 1998 through 1999, and much of this was produced in the New York City region, indicating that Wall Street exports are up.
(Firm Rank by Employment: Firm: No. of Employees)
Source: Crain’s New York Business, 3/27/00
It is no surprise that the New York City metro area has a higher percentage of its local nonagricultural workforce employed in the finance, insurance and real estate sector than other metro areas covered in this report. In June 2000, the New York City metro area employed 13.3% of its nonagricultural workers in finance, insurance and real estate. This was followed by Long Island, 6.9%; Buffalo-Niagara, 5.5%; Syracuse, 5.2%; and Rochester, 3.8%.
The nation’s “Big Five” management consulting and accounting firms also maintain a major presence in New York City. PricewaterhouseCoopers, Deloitte & Touche, Ernst and Young, KPMG, and Arthur Anderson, for example, employ a combined total of 19,000 people in New York City, according to Crain’s New York Business. This broad export sector also includes industries such as advertising and legal services. As more services are exported, the New York City region will continue to prosper.
Page 9 of 11
» Advanced Search
Get an inside perspective and stay on top of the most important issues in today's Global Economic Arena. Subscribe to The Manzella Report's FREE Impact Analysis Newsletter today!
Understand dynamic global markets.
Understand what’s occurred and more accurately assess what’s ahead. Improve your corporate strategic plan, seize the right opportunities, and boost competitiveness and profits.
Informative, analytical and policy-oriented perspectives.
Comprehend the impact of past events and fully grasp and prepare for the challenges ahead.