Offshoring Debate Rages On

It seems like The Economy has become the center of the current political debate, and one of the sore points for many voters is the loss of manufacturing jobs.

   In a pro-free trade op-ed article http://www.nytimes.com/2008/01/16/opinion/16landsburg.html?_r=1&pagewanted=print&oref=slogin in the January 18 New York Times, Steven Landsburg made the familiar case that "when American jobs are outsourced, Americans as a group are net winners." The argument, which we've all heard, is that even though you move from a $22.00 per hour job to one that pays $5.85 per hour, you're better off because you gain even more in the form of cheap clothes, cars, toothpaste and so on.

   His article provoked a number of outraged anti-offshoring responses http://www.nytimes.com/2008/01/20/opinion/l20trade.html, and I agree with most of them. But the most interesting comes from Scott Paul, Director of the Alliance for American Manufacturing, who argues that  "…there is, on average, a 50-to-1 economic advantage in keeping jobs in the United States…." The back-up for this claim, unfortunately is to be found in a recently released book, Enforcing the Rules, by Greg Mastel, Andrew Szamosszegi, John Magnus and Lawrence Chimerine.

   The book's argument is based on case studies involving products as diverse as shrimp and hot-rolled steel. It take into account direct lost revenue, e.g. steel mill sales, indirect lost revenue, e.g. the coal that coal producers don't sell to those steel mills, the cost associated with dislocated workers, with "Americans as a group" have to pay, and, importantly, the counter-balancing benefits of cheaper offshore goods. Unfortunately, the substantiation for the 50-to-1 number is elusive, although the case studies are compelling.

   But what's the bottom line here? It's absolutely unfair to cast the managers who have made the decision to outsource as unpatriotic - if not outright villains. But I think it is fair, and patriotic, to ask any manager who is confronted with the outsource vs. don't outsource dilemma to carefully consider three questions:

1. Do you have the math right? Have you accurately accounted for factors like on-the-water cost, lost cargo and the risk of delayed delivery?

2. Have you considered the risk of changes in rates of exchange? (What's profitable now might not be over the long term.)

3. Have you considered to what extent you are training potential competitors?

   Bottom line: The decision to outsource shouldn't be an automatic one.