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Out-Sourcing, In-Sourcing, and Globalization
Out-Sourcing, In-Sourcing, and Globalization
Economic globalization means creating a level playing field, all businesses are treated equally in all countries, when it comes to buying inputs or selling outputs.
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Transcript
The Trends editors have long been fans of economic globalization and free trade. But, we’ve also been vocal opponents of globalism. Is that inconsistent? We don’t think so.

Economic globalization means creating a “level playing field,” on which all businesses are treated equally in all countries, when it comes to buying inputs or selling outputs. That is, regulations that apply to local businesses apply equally to foreign businesses. And, while multi-national institutions, like the WTO, have moved the world toward this definition of globalization, some participants, China in particular, have pursued a “mercantilist strategy” which seeks to slant the playing field to its advantage. Over the past two years, the Trump administration has pushed back aggressively, primarily by negotiating new bi-lateral and trilateral treaties.

Globalism is a supra-national system which seeks to treat all individuals and businesses the same, regardless of citizenship or national origin. This value system does not recognize the importance of national borders and national identity to the well-being of the people of each nation. The institutions of globalism, ranging from the UN to the WTO to the EU, seek to minimize national identities and differences. In recent years, a widespread desire to limit globalism has driven the rise of Nationalism. For more details on the nationalism vs globalism debate, please refer to the October 2016 and March 2018 issues of Trends.

Politicians and members of the general public often convolute these topics, either intentionally or by accident. Specifically, we’ve heard a lot of criticism in recent years of U.S. firms outsourcing jobs, especially factory jobs, as well as accusations that countries like Mexico, China, and Japan are “stealing U.S. jobs.” The primary negative effect of this outsourcing has been increased U.S. unemployment which remained stubbornly high, until this year.

According to the latest available government data from the year 2013, the 14 million outsourced jobs identified was almost double the 7.5 million unemployed Americans. So, if all those jobs returned, it would be enough to also hire the 5.7 million who were working part-time, but would have preferred full-time positions.

However, it’s important to realize that for competitive reasons, most of those jobs, especially in manufacturing, would have been replaced by automation if barriers to outsourcing had been implemented. So, while the benefits would have accrued to some American workers, it might not have necessarily been the ones who lost their jobs to outsourcing. Meanwhile, all American consumers have benefitted the cheaper goods, whether imported or made in highly automated U.S. factories.

On the other hand, we haven’t heard nearly as much about the jobs that are “insourced” into every U.S. state by foreign companies, even though those insourced jobs employed more than 7.1 million Americans and represented 5.6% of all private sector U.S. jobs in 2016. The details are available in a recently released report by the Bureau of Economic Analysis titled “Activities of U.S. Affiliates of Foreign Multinational Enterprises in 2016.” The printable issue features a map which shows the hundreds of thousands of insourced jobs in each US state.

University of Michigan Economist Mark Perry identified some key statistics on jobs insourced to the U.S. that highlight the significant economic benefits to the U.S. economy from the thousands of foreign-based firms that outsource jobs and production from their countries to the U.S. For instance:
  • The current-dollar value-added of foreign-owned U.S. affiliates, a measure of their direct contribution to U.S. GDP, totaled $910 billion and accounted for 6.4% of total U.S. business-sector value-added in 2016 (the most recent year for available data);
  • These U.S. affiliates of foreign multinational entities (or MNEs) supported nearly 2.6 million factory jobs in 2016 and accounting for 21% of America’s total 12.35 million factory workers;
  • U.S. affiliates of foreign MNEs supported an annual payroll of $625 billion in 2016—with an average compensation per worker of $80,028;
  • U.S. affiliates of foreign companies paid an average annual compensation of more than $92,000 per employee in the manufacturing sector;
  • U.S. affiliates employed more than 410,000 US autoworkers in 2016, with average compensation per worker exceeding $76,000;
  • U.S. affiliates exported $379 billion in goods representing 26% of all U.S. exports;
  • U.S. affiliates imported $661 billion in goods representing 24% of all U.S. imports;
  • U.S. affiliates spent more than $65 billion on R&D in 2016 representing 12% of all U.S. R&D;
  • U.S. affiliates of foreign MNEs paid more than $48 billion in U.S. income taxes;
  • U.S. affiliates spent $278 billion on new property, plant, and equipment in 2016; and,
  • As a separate state, the $625 billion annual payroll of Americans working for foreign insourcing companies in the U.S. would have ranked that group of American employees in 2016 as the seventh largest U.S. “state” for Personal Income, just behind No. 6 Pennsylvania at $657 billion and ahead of No. 8 New Jersey at $555 billion.
In other words, the insourcing of production and jobs to the U.S. has a significant and positive impact on our economy.

But, in today’s highly globalized economy, multinational firms operate in a world marketplace that increasingly makes national borders meaningless and irrelevant, as firms capitalize on hyper-efficient global supply chains that add enormous value, and ultimately result in lower costs and higher quality for the goods that consumers buy here and around the world. And, we easily lose sight of the insourcing of millions of jobs into America by the 6,100 U.S.-based affiliates of foreign multinational companies that operate here and employ millions of our workers.

A more enlightened and up-to-date view of international trade would recognize the economic reality that modern businesses operate in an increasingly globalized marketplace for their inputs, parts, materials, and supplies along complex, cross-border supply and value chains that include multiple dozens of countries. In addition, those global companies serve retail markets in hundreds of countries around the globe.

It makes economic and business sense for thousands of foreign companies to outsource jobs and production from their countries to every U.S. state largely because the U.S. is one of their major retail markets. Similarly, it makes economic and business sense for thousands of U.S. companies to outsource jobs and production from the U.S. to foreign countries, because those overseas markets now represent more than 50% of retail sales for many U.S.-based companies. Consider a few examples:
  • Apple: 63% of 2016 sales were in foreign markets,
  • Procter and Gamble: 58% of 2016 sales were overseas,
  • GE: 62%of revenue came from foreign sales and
  • Pfizer: with 56% from overseas sales.
The Trends editors have no trouble with the administration using simplistic, nationalistic, “America First,” rhetoric to communicate with a diverse electorate at an emotional level. However, many advocates of globalism argue that message is dangerous. Obviously, an outdated view of the global economy based on a fixed number of jobs where countries have to fight to “steal” jobs from each other in a zero-sum, win-lose world, would make little sense. But the decision-makers on both sides of modern trade negotiation hold a more advanced and sensible view which is based on a dynamic world of inter-connected, cross-border transactions where production and employment decisions are grounded in the realities of economics, and not politics. Below the surface, the U.S. administration is coercing other governments to abandon market-distorting rules and regulations that favor their domestic producers. Given this trend, we offer the following forecast for your consideration.

First, in a free global economy, the United States will continue to dominate as it works to minimize barriers to fair competition. Why? According to the World Economic Forum The United States remains the world’s most competitive country overall and is #1 in skills, #1 in business dynamism, #3 in innovation, and it has the world’s #1 financial market. So far, China has won by limiting access to its domestic markets, subsidizing inefficient local enterprises, and “stealing” intellectual capital.” But now, the United States is applying unrelenting commercial, financial, diplomatic and military pressure against this system. Therefore, China can’t win unless the United States simply relents. That is because it remains a relatively poor, rapidly-aging country that relies very heavily on exports.

Second, the insourcing of jobs to the United States will remain a major positive for the U. S. economy. The U.S. economy is by far the world’s largest and most dynamic. By having sales, service, distribution and even manufacturing personnel in the United States, foreign-based multi-nationals ensure their competitiveness. At the same time, U.S.-based research and design capabilities take advantage of American technical expertise in places like Silicon Valley, Austin, Raleigh-Durham and Boston. The biggest challenge is closing the skills gap; like U.S.-based firms, foreign firms find it increasingly difficult to hire qualified Americans. Over the coming decade, both U.S. and foreign firms will turn increasingly to AI-based automation to handle many jobs creating a huge leap in productivity.

Third, despite the rhetoric, the U.S. multi-nationals will continue to “outsource jobs,” especially when it helps them serve foreign markets. However, the Trump administration has already moved aggressively to eliminate regulations and tax policies that encourage American firms to serve U.S. customers using foreign production resources. Because of cheap energy, enforcement of intellectual property rights, and advanced automation a great deal of new manufacturing capacity will be added in the United States, while many “para-professional” jobs will be performed by technicians located off-shore. And,

Fifth, as we’ve long-predicted the next phase of globalization will mean a slowing China and an accelerating India. China is already seeing manufacturing jobs flow to cheaper labor markets like Malaysia, Vietnam, and Bangladesh. India is not only picking up some of those manufacturing jobs, but also building critical mass in the kinds of para-professional fields increasingly outsourced because of costs and high-speed communications. The big challenges for India remain poor infrastructure, wide-spread energy poverty, and high-levels of corruption.

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