Cost of Outsourcing

"We are outsourcing all of the United States industrial base to China. That also has national security along with economic implications in the future" -- Peter DeFazio

Globalization has been a reoccurring concept over the past few decades; it appears that the world gets smaller before we get a chance to reflect on its consequences thanks to communication, technology and trade between different entities of the world. With the mention of globalization with respect to the United States, one can't help but think of the ongoing attacks on outsourcing especially with the heavily debated election filled with negative ads portraying one candidate as sacrosanct while the other an utter heathen. Come to think of it does anyone truly know why it has such a negative connotation to it or even the fact that what are the true costs of outsourcing and how it impacts us as a nation? Well, among the clutter lies the truth about outsourcing and how it affects the U.S. and it corporations, namely, loss of jobs, loss of labor and corporate taxes, loss of managerial control, quality control problems, threat to security and confidentiality and last but not least the hidden costs of outsourcing that might not be taken into consideration at first glance.

Starting with the most talked about area of them all, the dreaded flight of jobs, within the manufacturing as well as the service sectors with the influx of outsourcing in the U.S. job market. According to an article by Martin Dean Dyer, a professor at Louisiana State University, U.S. job losses are a direct result of oversees outsourcing in fact, within his article he points out that Forrester Research estimates that 3.3 million collar jobs will be outsourced by the year 2015. There is also wide concern that America is not aware of exactly how many jobs are being lost. In a Study by Cornell University, it was found that the U.S. Bureau of Labor underestimated the number of jobs lost to U.S. outsourcing. In 2004, the Bureau reported 4,633 jobs lost between January and March of that year. A recent study shows that 46,417 jobs were actually outsourced during that time period. Of the 46,417 jobs lost, 8,283 were sent to China. In fact a table below gives a breakdown of how cost effective and beneficial it is for corporations to ship jobs oversees as opposed to keeping them in-house (Dyer).

To add insult to injury but the sheer size of the exodus isn't what worries analysts the most -- it's the type of jobs. Some scholars are worried that fact that it is time the corporate main office is primed to layoff almost all its workforce in the U.S. and head overseas in search of cheaper and cost efficient ways to do business. According to an article on PBS.org, as reported on NOW, a new wave of jobs are leaving U.S. shores: software development, customer service, accounting, back-office support, product development and other white collar endeavors. And it's not just technology jobs that have ended up in India. According to Deloitte Consulting, 2 million jobs will move from the United States and Europe to cheaper locations in the financial services business alone. The exodus of service jobs across all industries could be as high as 4 million. It forecasts that three-quarters of leading financial institutions and investment banks will allocate tasks to Third World countries in the next five years and that India will be at the top of the list. Charles Schwab recently moved part of its information technology division to a contractor in Bangalore, India. AOL already has a large presence in India. American Express and British Airways have ramped up their employment in the country during the past year as well (America and Jobs). Another article that points to the dwindling U.S. job market is from the New York Times, which states that nine percent of non-seasonal U.S. layoffs in the first quarter were due to outsourcing. However, addressing the fact that the article is a few years old could change perceptions on how great a role outsourcing plays now in the labor market as opposed to the role is played half a decade ago (REUTERS). In fact, for every manufacturing job the economy loses it also loses one-to-three secondary and tertiary jobs such as grocery clerks, construction workers, gas station attendants, tax professionals and state and local government jobs. With the mounting pressure that U.S. workers face in order to compete with workers in other countries based on the evidence provided it seems like an uphill battle for them and one that they are more likely than not too loose. Not only that, but if the U.S worker faces such problems in a consumer based economy like ours it is all but sure that the corporations, mom and pop shops and other businesses will suffer as households try to meet basic needs.

Looking at another cost of outsourcing is the loss of corporate as well as wage taxes reported to the federal government. According to an article by a Conservative group run website, the U.S tax system allows corporations to bring home foreign profits taxed at 5.25% rather than the standard 35%. It is no coincidence that corporate tax collections relative to sales have decreased as jobs have been transferred overseas. In other words, this system allows U.S. based companies to bring in revenues from their locations oversees at a tax rate of 5.25% as opposed to the 35% that they would have to pay if they were generating revenues at home. Such a tax system not only incentivizes corporations to go abroad but also penalizes those that try to generate revenues at home. For example, a computer company makes a chip in the US, ships it to a foreign country (that provides a tax holiday to attract the company manufacturing facility) where it is installed in a computer and returned to the US. Most of the costs (research, administration, sales and marketing) are assigned to the US operation but the revenue is credited to the foreign manufacturing operation. With a tax holiday the company pays no taxes in the foreign country and pays little or no taxes in the US. Once the tax holiday is over in that foreign country, the US company packs up and moves to another country where it receives another multiple-year tax holiday. The IRS may audit the company and adjust the profits to better reflect the actual source of profits. Assuming they are audited, the company will then negotiate directly or after filing an appeal will settled with the IRS for a small fraction of