The Magazine

Traders Are Not Traitors

From the March 29, 2004 issue: Outsourcing is good for America--and the world.

Mar 29, 2004, Vol. 9, No. 28 • By CESAR CONDA and STUART ANDERSON
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WHO IS the unilateralist candidate for president this year, the man who's willing to push our allies away and who questions the patriotism of those who disagree with him? That would be John Kerry, at least on the issue of trade. Kerry may like to portray himself as a multilateralist, whom foreign leaders are secretly rooting for. But when it comes to trade policy and the outsourcing debate, he claims that it's America versus the world.

The recent flap over outsourcing--the buzzword for American companies' hiring professional workers abroad--is almost purely political. Reliable data show that America is not "losing" jobs to foreign workers. "Despite the political outcry over the outsourcing of white-collar jobs to such places as India and Ghana, the latest U.S. government data suggest that foreigners outsource far more office work to the U.S. than American companies send abroad," reports the Wall Street Journal. Indeed, according to the Commerce Department, the value of "legal work, computer programming, telecommunications, banking, engineering, management consulting and other private services" performed by U.S. workers for foreign clients rose about 7 percent in 2003. In other words, "outsourcing" is a net creator of jobs for Americans, not to mention its benefits for the overall health of the economy.

Despite this, Republicans have been on the defensive ever since the February 9 press briefing of Gregory Mankiw, chairman of the President's Council of Economic Advisers. "Outsourcing," Mankiw explained, "is just a new way of doing international trade. We're very used to goods being produced abroad and being shipped here on ships or planes. What we're not used to is services being produced abroad and being sent here over the Internet or telephone wires. But does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiberoptic cables? Well, no; the economics is basically the same. More things are tradable than were tradable in the past, and that's a good thing."

All true. The outrage from Democrats over the remark unfortunately was not matched by a vigorous White House defense. Indeed, a number of Republicans in Congress piled on against Mankiw.

Even by Washington standards, political rhetoric on the outsourcing issue has been abysmal. For example, on the night of the Wisconsin primary, John Kerry tarred all companies that do business outside America's borders as traitors: "We will repeal the tax loopholes and benefits that reward Benedict Arnold CEOs and companies for shipping American jobs overseas." He was a bit more scrupulous the next day, in response to a union member asking if he would pledge to keep jobs in America. Kerry replied with surprising candor: "I don't want to lie to you. If a candidate stands here and said 'yes' to you in answer to that, they're not telling you the truth. You know, we don't have the right constitutionally to stop a company from going overseas if it wants to."

Kerry has mostly received a free ride from the media over his demagoguing on outsourcing and flip-flops on past support for free-trade agreements like NAFTA. And no one in the media seems to have recognized the glaring discrepancy between his trade policy--which would alienate almost every foreign government--and his frequent complaints that the Bush administration has "pushed away our allies."

Kerry early on saw political possibilities in exploiting the outsourcing issue. In November 2003, he introduced a bill to regulate U.S. companies' use of call centers abroad by requiring "each employee in the call center to disclose [his or her] physical location." The press release announcing the bill stated that requiring operators to disclose they are foreigners would "go a long way to preserve U.S. jobs."

There is an unusual premise to Kerry's legislation: It assumes that if Americans discovered they were speaking to foreigners they would either hang up the telephone or protest in some other manner. It is not clear how the bill would save jobs, unless you assume Americans have little tolerance for even the most modest level of international engagement. Of course, the entire preoccupation with call-center jobs is a bit strange, since Kerry and other members of Congress had previously passed "Do Not Call" legislation that, according to telemarketing industry estimates, could eliminate as many as two million U.S. call-center jobs.

Some innovative U.S. companies have already come up with solutions to the outsourcing controversy that do not risk a trade war or other foreign policy harm. California-based E-Loan offers its customers a choice of having their loan paperwork processed in India or in the United States. Customers are informed that if they press the "India" button, their loan will be processed in one day, while the U.S.-based work may take two days or longer. More than 80 percent of customers for home equity loans, according to the company, have chosen to have their work done in India--a choice that some elected officials would like to take away from them.

The Bush administration's political performance on the outsourcing issue could be stronger. The president recently warned against "economic isolationism," which put Kerry and some Democrats on the defensive for a day or two. However, the administration has itself been inconsistent on the trade issue.

The stakes internationally are high. President Bush declared last year at West Point that a pillar of U.S. foreign policy is to advance liberty on all continents. Free trade in goods and services can be an important tool for accomplishing peacefully what our soldiers are, in part, fighting for in Iraq, namely a transition to a freer and more prosperous world that, in turn, will make Americans more secure.

New York Times columnist Thomas Friedman recently described his conversations with some of the young Indians being accused of taking American jobs:

Kiran Menon, when asked who his role model was, shot back: "Bill Gates--I dream of starting my own company and making it that big." I asked C.M. Meghna what she got most out of the work: "Self-confidence," she said, "a lot of self-confidence, when people come to you with a problem and you can solve it--and having a lot of independence." . . . There is nothing more positive than the self-confidence, dignity and optimism that comes from a society knowing it is producing wealth by tapping its own brains--men's and women's--as opposed to one just tapping its own oil, let alone one that is so lost it can find dignity only through suicide and "martyrdom."

Friedman noted a striking contrast between his conversations with these young outsourced workers and conversations he had had "on the West Bank, talking to three young Palestinian men, also in their twenties, one of whom was studying engineering. Their hero was Yasser Arafat. They talked about having no hope, no jobs, and no dignity, and they each nodded when one of them said they were all 'suicide bombers in waiting.'" Friedman warned: "There is more to outsourcing than just economics. There's also geopolitics. It is inevitable in a networked world that our economy is going to shed certain low-wage, low-prestige jobs. To the extent that they go to places like India or Pakistan--where they are viewed as high-wage, high-prestige jobs--we make not only a more prosperous world, but a safer world for our own 20-year-olds."

Even though the rest of the world views U.S. trade policy as an important element of U.S. foreign policy, commentators here have been slow to see Kerry's trade rhetoric, including implied threats to pull out of existing trade agreements, as problematic. The closest thing to a critique came in a March 15 Washington Post editorial: "It is hard to know what Mr. Kerry means by his trade-and-labor rhetoric, just as it is hard to know how to balance his pro-trade votes in the Senate against his campaign denunciation of 'Benedict Arnold' companies. It's good that Mr. Bush is attacking on these issues, and it's time for Mr. Kerry to clarify his thinking."

It's clear that Democrats believe denouncing "outsourcing" is a political winner for them, despite the potential for real harm their proposals would bring. A bill by Senator Tom Daschle, cosponsored by Kerry, would make notifications of "mass layoffs" more stringent in U.S. law than in France and Germany. Daschle's measure, which soon may be offered as a Senate floor amendment, would require U.S. companies to provide 90 days' notice to the federal government when transferring work abroad that affects the jobs of as few as 15 employees. The vague definition of "offshoring" in the bill and the way global companies routinely create and eliminate jobs worldwide could discourage some large companies from adding U.S.-based jobs in the first place.

Federal Reserve Board chairman Alan Greenspan recently warned a House committee that the "protectionist measures" now being proposed are "alleged cures" that "would make matters worse rather than better. They would do little to create jobs, and if foreigners were to retaliate we would surely lose jobs."

The administration and elected officials who know better need to speak up before this year's campaign degenerates into a bidding war of bad ideas. Otherwise, Americans will face the prospect of fewer jobs, higher prices, and a less free and prosperous world.

Cesar Conda, who formerly served as Vice President Dick Cheney's assistant for domestic policy, is a board member of Empower America. Stuart Anderson is executive director of the National Foundation for American Policy, an Arlington, Va.-based public policy research organization.