As I listen to the debate over outsourcing, I'm reminded of the song "Everything Old Is New Again." Some pundits discuss outsourcing -- that is, shifts in jobs and investments between national jurisdictions -- as a new phenomenon. But if you do a bit of digging, you'll find that outsourcing is hardly new, and neither are fears about it. Such fears tend to rise to a fevered pitch during economically turbulent times, but then fade away once a recovery begins.
Consider America's last period of serious economic trouble, the 1970s, a time of oil shocks and sky high inflation. In October 1974, economist C. Fred Bergsten, writing in Foreign Affairs, warned of an anti-outsourcing backlash to come.
Bergsten outlines a hypothetical scenario in which a large U.S. company makes a major investment in Canada. The Canadian government then boasts about this investment bringing thousands of additional jobs into the country and contributing millions of dollars to Canada's trade balance.
This leads to anger south of the border, as the AFL-CIO denounces the investment in Canada as an example of foreign countries robbing American workers of good jobs. Under political pressure, the Treasury Department attacks the investment as well, saying it will exacerbate America's balance of payment problem. Finally, such political grandstanding would stoke U.S. anger "against all foreign investment by American firms."
Bergsten worried about the rise of a titanic struggle between competing jurisdictions over "the international location of production." He believed that tensions over production "will almost certainly continue to grow in both magnitude and impact," with the potential to generate "open political hostility among nations, a severe blow to the world economy, and a shattering of investor confidence."
He was, however, also hopeful that companies and states could cooperate to prevent this from taking place -- a hope that proved well-placed, as the anti-foreign investment mood of the time abated.
AS BERGSTEN'S ARTICLE ATTESTS, fears about outsourcing are nothing new. But regardless of when they appear, they draw strength from the same fallacy, which was described by Percy Bidwell, a researcher for the Council on Foreign Relations, in 1945. The problem lies in a distorted view of exports vs. imports.
Bidwell noted that most Americans "glorify exports as a means of producing employment at home." Imports, however, "have no such glamor." Indeed, "in the popular view…importers are engaged in a somewhat dubious occupation. They bring in foreign goods which seem to displace an equivalent amount of domestic products, thus creating unemployment and sabotaging the national economy."
But such a view is short-sighted. Bidwell called on Americans to realize that "exports and imports are really two sides of the same coin...We cannot logically bless one and curse the other." Purchases of foreign goods "furnish the dollars with which foreigners buy [American] goods." The fewer imported goods purchased in America, the fewer dollars foreigners would have to buy U.S.-made goods -- making new sales tough for American exporters.
Today's anti-outsourcing zealots make the same mistake. They tout the opportunities that the global economy creates for the U.S. exporters while cursing the chances that same economy when it gives producers in poorer countries to compete with U.S. manufacturers for American consumers' dollars.
I ran across a particularly pointed example of this fallacy the other day when I was paging through J.R.M. Butler's fine biography of Lord Lothian, a British diplomat. In a transcript that's included as an appendix, we eavesdrop on a meeting that Lothian had with a foreign head of state. This leader worried about the possibility of jobs in his country being outsourced to poorer countries.
This head of state argued competition between workers in industrialized countries was "fair" because they "have certain standards," but that workers in poorer countries were too ready to "accept a low standard of life." The rich countries would be better off, he said, trading their manufactured goods for the poorer countries' raw materials than allowing them to become industrialized, even if outsourcing meant cheaper goods.
THAT THE LEADER'S name was Adolf Hitler should not surprise. Such ideas are in keeping with what passed for the economic thinking of National Socialism. However, these ideas were neither new nor unique to the Nazi ideology.
As European powers created empires in the Americas, in Africa, and in Asia, the ideas of mercantilism -- that trade should managed and regulated by the central government of the conquering country to encourage exports and discourage imports -- sailed with the flags of the various nations. Though imperialism has faded, the mercantilist mindset continues to shape how we think about trade. I emphatically do not mean to call the anti-outsourcers a bunch of racists or Nazis, but that Lou Dobbs, say, or Ralph Nader, continue to advance arguments which were advanced in 1935 should not come as a surprise -- all these canards share the same mercantilist roots.
Fortunately, the anti-outsourcers of the past have proved very wrong. Large swaths of Asia are now industrialized and Europe is no worse off for it. It's a shame that history gets so little play in the current debate over outsourcing. It just might put things in a whole new light.
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