Offshoring and U.S. Public Policy:

Issues and Actions

Elana A. Cohen

Submitted: May 3rd, 2004

Introduction

Outsourcing has become a major political issue. The media regularly

highlight many different voices expressing wide-ranging views on this hotly

debated topic. Each of these voices and the groups they represent are hoping

to impact public policy in a manner that will have broad reaching

implications for many generations to come. Incumbent members of state

and national legislative bodies are now adding their voices to what is

becoming a political “hot button” for candidates currently running for office.

This national debate is beginning to impact policy decisions with long

term implications for our nation. Before examining some of these decisions,

it is critical to understand the current political climate that is framing the

hotly charged national debate. This paper will first address key issues that

are being raised by various constituencies along with those data, where

available, that these groups are using to support their positions. The paper

will then turn to an examination of current policy decisions.

Issues Framing National Debate

Job Loss

Increasingly the national debate tends to focus on jobs lost through

offshoring. Currently Forrester (a Boston based research firm) estimates the

U.S. has offshored approximately 400,000 jobs. The group projects the

number of U.S. jobs offshored will grow to 3.3 million jobs by 2015,

equating roughly $136 billion in wages.

The February Economist article entitled, “The great hollowing-out myth”

disputes the claim that the loss of U.S. jobs is structural in nature. The

article claims that in the absence of an obvious jobs recovery, the myth arose

that the American economy was suffering from structural rather than

cyclical changes. Three distinguished economists, William Baumol, Alan

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Blinder and Edward Wolff in their recent text Downsizing in America:

Reality, Causes and Consequences debunk this structural theory and further

illustrate that the loss of U.S. jobs is in fact more cyclical in nature. The

authors refer to this phenomenon as job churning, an event where margins

are always higher for the creation of new jobs in comparison to the jobs

destroyed. The graphic below highlights this U.S. job churning

phenomenon.

Figure 1: U.S. Labor Statistics1

The U.S. Bureau of Labor Statistics estimates that 25-30 million jobs are

being destroyed and created each year. Assuming the Forrester data are

accurate, offshoring accounts for 1% of the jobs being destroyed in a given

year.2 Today 138.6M Americans are working, which is at nearly a record

high both as a proportion of the population and in absolute terms. (It should

be noted that between 1980 and 2002 the percentage increase of employed

Americans, 37.4%, was greater than the U.S. population growth, 23.9%.)

The Economist article presents one major flaw in its fundamental

argument, characterized by the fact that in order to fully prove “the beauty of

1 “The great hollowing-out myth,” The Economist, February 19, 2004.2 “Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World,” American Electronics Association, March 2004, http://www.aeanet.org/publications/IDMK_AeA_Offshore_Outsourcing.asp

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churning” theory one needs data on current worker wage rates after periods

of economic recovery. While in the past the margins have always been

higher for the new jobs created, it is unclear whether this theory holds true in

today’s marketplace.

Further, until very recent times, the media have concentrated largely on

the job losses in the manufacturing sector. These losses, however, are not a

recent phenomenon; rather the manufacturing sector has been in decline

since the late sixties. It should be noted that manufacturing provides

employment for 12% of the U.S. population. (Agricultural accounts for

3%). Regrettably one can only examine gross trends for the remaining 85%

of the U.S. population employed in the service sector. The government

doesn’t collect detailed statistics on this segment.

Types of Jobs Affected

The McKinsey Global Institute (MGI) reports that organizations today

are offshoring increasingly complex job transactions. The graphic below

illustrates the nature of the jobs currently being offshored.

Figure 2: Current trend in offshore job functions3

These jobs range from basic data entry to engineering and design.

The infamous Business Week article titled, “Is Your Job Next?”

summarized the issue well:

3 “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, August 2003.

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Increasingly complex functions

Back officeCommon corporate functions

Customer contact

Research and

development

Knowledge services and

decision analysis

“The next round of globalization is sending upscale jobs offshore. They include basic research, chip design, engineering – even financial analysis. Can America lose these jobs and still prosper? Who wins? Who loses?”4

The jobs that are currently being offshored are no longer the low paying

blue-collar jobs. The ramifications of white-collar jobs on the economic and

technological strength of the U.S. present some extremely complex issues

ranging from educational reform to national security.

For those jobs left behind, some rather disturbing trends are also being

noted. The development of offshoring is now being linked to the expansion

of contingent work in the United States. The term contingent work refers to

contractors, temporary and part-time workers and leased employees. In an

effort to minimize fixed costs of employment and increase flexibility, firms

are increasingly replacing permanent workers with contingent employees.

Companies are retaining a core set of capabilities and hiring less-skilled

lower-wage non-core employees to perform work required during demand

fluctuations. The non-core workers are hired on contract directly or through

a subcontractor. A recently published white paper entitled, “Outsource

This?” described the strong correlation between outsourcing and contract

work:

“A CNN report on outsourcing notes that it is ‘the logical extension of the process that began with contract manufacturing and continued into

corporate services’ in which work is ‘spun off into contracts rather than tied to employees.’ Once a person’s labor can be reduced to a contract, ‘it matters little whether the contract is filled in India or Indiana; the only

relevant issue is cost.’ As soon as a job becomes routine enough to describe in a spec sheet, it becomes vulnerable to outsourcing. And without a ‘social contract’ binding employer and employee, long-term jobs are an illusion.”5

4 “Is Your Job Next?” Business Week, February 3, 2003.5 Brecher, J. and Costello, T., “Outsource This? American workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

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Among examples used to illustrate the hazards of firm contingent work

are those occurring in situations where companies hire back the employees

they have laid off, only under a temporary work contract. The American

Staffing Association determined that 30% of employers rehired employees

who had been downsized under temporary contracts.6

In 2003, U.S. staffing firms hired approximately 10.7 million temporary

and contract employees (1 million more than in 2002). 7 U.S. staffing firms

employed nearly 2.5 million temporary and contract workers, an estimated

2% of the U.S. workforce. In 1999, former Labor Secretary Robert Reich,

calculated that the number of self-employed contract workers accounted for

20% of the total labor force. In 1999, the American Staffing Association

approximated revenues in the staffing industry at $3 billion. This was a

dramatic increase relative to the 1991 figures of $335 million. 8

Economic Impact

The McKinsey Global Institute (MGI) determined in their research, that

offshoring will allow the U.S. to capture economic value through a variety

of channels including: (a) net cost reduction, (b) export of goods and (c)

repatriated earnings.

(a) Net cost reduction: Reduction in cost is the primary reason why

most firms elect to offshore; businesses capture 58 cents for every

dollar spent offshore.

(b) Export of goods: Offshore service providers purchase an

additional 5 cents for every dollar spent offshore worth of goods

and services.

6 Cappelli, Peter, The New Deal At Work, Harvard Business School Press: Boston, MA, 1999.7 “Staffing Shines In 2003,” Staffing Today, March 1, 2004, http://www.staffingtoday.net/staffstats/index.html. 8 Carr, Lisa, “Staffing Industry Hailed as Genuine Article,” Staffing Today, http://www.staffingtoday.net/memberserv/0300ss/story3.htm

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(c) Repatriated earnings: Companies that repatriate their earnings

in the U.S. generate an additional 4 cents for every dollar

offshored.

In addition, for every dollar of U.S. labor cost offshored, $1.45-$1.47 is

created globally (the U.S. captures $1.12-$1.14).

MGI also factors in redeployed labor, making the assumption that the

economy will capture an additional 45-47 cents per dollar from the new jobs

generated. This assumption appears overly optimistic given a current market

where many workers in the I.T. and engineering fields are struggling to find

work. The Bureau of Labor Statistics illustrate that 31% of the individuals

whose jobs were displaced by trade during the period 1979-1999 were

unable to find reemployment. Further the statistics reports show that 55% of

displaced workers were working at approximately a 15% wage reduction,

while 25% were working at a 30% wage reduction.

The McKinsey Global Institute (MGI) assesses the impact that offshoring

will have on U.S. employment is minimal in overall magnitude. The firm

concludes that the current fear around job losses, exaggerates the likely

impact of offshoring. In addition, MGI states that approximately 70% of the

U.S. economy is comprised of services (e.g. retail, hotels, restaurants, etc.).

These services must be based locally and can’t be offshored. This argument

doesn’t help to alleviate any of the current public policy issues that have

arisen in recent months. Are we creating a cultural environment where the

vast majority of the next generation will work at local Wal-Marts? The

statistics show that Wal-Mart has, in fact, grown by 4,700% between 1980

and 2002.9

For every dollar offshored, the U.S. indeed captures $1.12 - $1.14 in

value. However, when the U.S. “captures value” the reference is with 9 “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, August 2003.

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regard to the U.S. businesses and consumers. The critical variable here is

that not all consumers are workers. Therefore, while the wealthier become

wealthier, according to Economy.com the government could lose an

estimated $13.4 billion in tax revenue over the five years from high-value

jobs moving offshore. This figure translates into $7.5 billion in lost Social

Security and Medicare, $4.4 billion in federal revenue and $1.5 billion in

state and local government taxes. Hence the middle-class Americans will be

the group most widely impacted. (While the war in Iraq is currently costing

approximately $4 billion per month, these numbers should not be

underestimated.)10 At present the U.S. has the greatest gap of income

distribution of any developed country, with the top 1% earning 17% of the

gross national income (this level was last seen in the 1920s).11

Impact on Technological Innovation

“A nation’s ability to innovate is at the core of its economic and technological strength. Location matters when it comes to the innovation process because it generates enormous local spillover benefits and feeds

on itself. An obvious example is Silicon Valley.”12

As firms continue to offshore manufacturing and related functions, the

technological ramifications have yet to be fully determined. The most

obvious consequence of offshoring in the past was that technological

improvements in manufacturing processes were discovered and perfected at

the location where they were produced. Today more and more firms are

relocating the entire firm innovation process: content development, design,

engineering and testing near their manufacturing facilities.

10 Dignan, Larry, “Depleting the U.S. Tax Base,” eWeek, September 5th, 2003, http://www.eweek.com/article2/0,1759,1265111,00.asp11 Brecher, J. and Costello, T., “Outsource This? American Workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.12 Hira, Ronil, “Global Outsourcing of Engineering Jobs: Recent Trends and Possible Implications,” IEEE, June 2003, http://www.ieeeusa.org/forum/POLICY/2003/061803.html.

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The offshoring of these high-tech jobs is made possible by the concurrent

transfer of intellectual property (IP). The IP transfer represents valuable

knowledge consisting of corporate property. Companies distinguish

themselves by this proprietary IP. The IP often consists of the technology

(i.e. documentation, prior versions, quality control processes) and the

business methods (i.e. marketing strategy, supply chain strategy). There are

many components of IP including patents, copyrights and trade secrets.

Geo Wiederhold, Professor at Stanford University, writes that the indirect

effects and ramifications of IP transfer are difficult to predict. Currently

much of the U.S. based IP transfer is unrecognized; subsequently firms pay

no taxes on the resulting profit. As a result there is an imbalance in regards

to income location versus IP location. Current trends illustrate excessive

cash accumulation outside of the U.S. (i.e. when a firm’s foreign profits are

large) which in turn encourages further investments outside of the U.S.

Subsequently the numbers of U.S. based high-tech jobs continue to rapidly

decelerate.

Impact on Human Resources

In a discussion of offshoring during a recent television interview,

Michael Porter, Harvard Business School Professor, expressed that his

greatest concern about offshoring was its impact on our national human

resources.13 The subsequent discussion centered on the difficult issues faced

by educational system in this country, primarily the K-12 system in

preparing our future work force. In addition to such problems as our math

and science education, however, the concerns are even more broad-based.

13 Charlie Rose Show, PBS, April 30, 2004

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The American Engineering Association (AEA) firmly believes that better

education will not protect American high-tech jobs. The association states

that, “…..College-educated Americans are competing against college-

educated foreigners who earn 1/10 to 1/4 what they do. And for the half of

all Americans who won't go to college, it's even worse.”14

As more and more scientific and engineering jobs are shifted to lower

cost offshore locations, the downward pressure on U.S. job opportunities,

wages and working conditions will become increasingly apparent. As a

result of these trends America’s young people will be less likely to pursue

careers in science and engineering. The Computer Research Association

conducted a study (which will be published in May) indicating that the

enrollment of undergraduate students in computer technology and

engineering has dramatically decreased by 19%. Many educators speculate

that the dramatic drop in enrollment is a result of student concern regarding

the growing trend of sending software industry work overseas. Ironically,

while Microsoft continues to offshore software jobs, Bill Gates embarked on

a tour of major university campuses in February of 2004 to encourage

students to continue their studies in computer science and engineering.15

Redeployed Labor Force

Concerns regarding the United States’ future in technology are often

assuaged by blind faith in the ‘next big thing.’ The next big thing will

provide displaced workers with the opportunity for a new career and

increased wages. Robert Reich, the former secretary of labor under the

Clinton administration, believes that worldwide innovation will generate

high-tech jobs. He is quoted as stating, “There’s no limit to the human

14 Fletcher, Ian, “20 Defenses of Offshoring and Why They are wrong,” American Engineering Association, http://www.aea.org/20_refute.htm.15 “Outsourcing making US students shun computer sciences?” Newindpress.com, March 28, 2004, http://www.newindpress.com/NewsItems.asp

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mind. And there’s no limit to the human needs that can be satisfied.”16 Ronil

Hira, associate professor at the Rochester Institute of Technology expressed

his concern for this viewpoint, “The argument is that something better will

always come along, but that’s blind faith to me. It not clear to me what’s

next.”17

Hira, also chairman of the career and work force policy panel at the U.S.

branch of IEEE counters those who strongly support the need for retraining

initiatives when he states, “I don’t think this is the answer….some of the

people who are being displaced are some of the best and brightest.” 18

Secretary-treasurer of the AFL-CIO (a federation of labor unions

representing more than 13 million U.S. workers) shares Hira’s pessimism

about retraining:

"Everyone talks about retraining, but the problem is that these days, if you're out of work, there's not a job in the area you're trained in and not a job in the area you're retrained in. Everybody used to think services were

exempt or high-tech jobs, but the new economy is being outsourced. Retraining is not the magic solution because there isn't an industry that is

safe from the trend anymore that provides the solid jobs needed by the American middle class."19

Catherine Mann, senior fellow at the Institute for International

Economics, points out other key issues that must be considered in the cost of

retraining workers. She points out that the costs of adjustment must be

considered. Not only is there the problem of helping people locate new jobs,

but she feels there must be human capital investment tax credits to give

firms the incentive to train. She also mentions the need for providing

16 Brown, B. and Post, D., “On the Horizon: Outsourcing Deserves Policy Discussion,” InformationWeek, November 17, 2003, http://www.informationweek.com/story/showArticle.jhtml?articleID=1610069117 Dignan, Larry, “The Next Big Thing: Blind Faith in U.S. Innovation,” eWeek, September 5, 2003, http://www.eweek.com/article2/0,1759,1265154,00.asp18 Graham, Jed, “Fed Chairman: Education Key to Outsourcing,” Investor’s Business Daily, March 12, 2004.19 “Roundtable on Outsourcing,” The Wall Street Journal Online, http://wsjclassroom.com/archive/04apr/04apr_related_roundtable.htm

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workers with “wage-adjustment assistance.” Further she stresses the

importance of portable health coverage for workers.

In discussions of health coverage and its importance to the worker, other

groups such as the American Electronics Association (AeA) point out that

issues relating to health care and health care reform could have major

implications for state and federal competitiveness. AeA notes that at both

the state and federal levels, litigation and regulatory costs have risen

dramatically. The group state, “The future of health care and the health care

debate will now have to incorporate the reality that health care costs for U.S.

companies could greatly undermine their international competitiveness.”200

Security Implications

Professor Ronil Hira, associate professor at Rochester Institute of

Technology and IEEE representative, states, “It’s interesting that the defense

department hasn’t been paying more attention here.” In the past the military

has protected technologies viewed in the national interest, such as encryption

software and chip manufacturing. However, assuming that the current trend

continues there will be no software industry at all in the United States. The

majority of firms will have offshored a large percentage of their software

work. Programmers will no longer have the opportunity to advance their

technology skills and learn from senior level experts (i.e. all of the jobs for

senior level experts will be offshored). Subsequently the U.S. government

will have a difficult time finding someone to integrate and test the software

that has been written. The following quote summarizes the current security

concerns that have been recently raised:

20? “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004, http://www.aeanet.org/GovernmentAffairs/zdutVvNoDmKUvpbAtBTPgKwYLyhyFec.pdf

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“Do you think it wise if, in the future, our software for banking, air traffic control, power stations, bridges, water systems, boat traffic, etc. is written

offshore? Who will check it? We will have lost our industry."21

In addition, the offshoring of information technology and engineering

outside of the United States will reduce opportunities for domestic

innovations in areas such as data communications and data security

applications. National security will be subject to increasing risk as

responsibility for proprietary and mission critical military is offshored.

Richard Hunter, an analyst at Gartner Inc., downplays the implications of

offshoring on the welfare of national security. Hunter states that the

Pentagon would still have the ability to procure technology developed

offshore. In addition he believes that through the use of a global supply

chain, the U.S. would rely on several nations for information technology.

Hunter states, “It’s not like oil. Technology by definition doesn’t have

borders.” Hunter trivializes the complexity that offshoring of technology

pertinent to national security presents. Lt. Col. Ken McClellan, a Pentagon

press officer, states that the military is currently examining the issue.

Further the National Security Agency will have to study the implications of

partners using offshore outsourcing and the security tests that offshore

workers will have to pass.22

Public Policy Actions

The public debate surrounding outsourcing is now making its way into

the chambers of state and federal legislative bodies where some of the issues

dominating this debate are now influencing decision-making. At the state

level, at least 36 states have introduced more than 100 Bills to curb or ban

21 Maranjian, Selena, “Offshore Outsourcing Soundoff,” The Motley Fool, March 18, 2004, http://www.fool.com/news/commentary/2004/commentary040318SM.htm22 Dignan, Larry, “National Security: Off the Radar,” eWeek, September 5, 2003, http://www.eweek.com/article2/0,1759,1265133,00.asp

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offshore outsourcing.23 For example, Arizona Governor Jane Napolitano has

mandated that all future state contracts will require all work to be performed

in the United States. This decision came after recent awareness that an

estimated 19,000 telephone inquiries from Arizona’s state welfare and food

stamp recipients were being routed to call centers in Mexico and India by a

tax-payer funded private firm. The legislative action was being mandated

under security and privacy concerns.24

Currently there are numerous federal legislation activities addressing

offshoring; some of these recent federal legislation activities are assessed in

this section. In addition, the appendix provides an up to date listing of the

current federal legislative activity. The majority of the bills can be grouped

according the following categories: (a) Immigration, (b) “Buy-American”

Provisions, (c) Labor Law and (d) Procurement.

Other initiatives that merit close attention are also included in this

section. These include taxation issues and education and worker retraining.

Immigration

Legislation has been introduced by several members from Connecticut to

greatly limit the use of both the H-1B and L-1 visa. Subsequently, a Florida

representative has introduced legislation to limit the use of the L-1 visa. This

was triggered after Siemens was utilizing L-1 visa holders to move jobs to

India.25 The L-1 intra-company transferee visa permits executives, managers

and employees with specialized skills to transfer to a U.S. office, subsidiary,

or affiliated company to perform temporary services. Initially, L-1 visas are

granted for one to three years; extensions are then made available in two-

23 “Outsourcing Bills may Affect US Trade,” Sify.com, April 21, 2003. http://sify.com/finance/fullstory.php?id=1345893924 Kammon, Jon, “Governor Halts State’s Offshoring,” The Arizona Republic, April 15, 2004.25 “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004, http://www.aeanet.org/GovernmentAffairs/zdutVvNoDmKUvpbAtBTPgKwYLyhyFec.pdf

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year increments, with a total stay not to exceed seven years.26 The H-1B is a

nonimmigrant classification used by an alien who will be employed

temporarily in a specialty occupation for a maximum period of six years at a

time. In 2004, the number of aliens issued a visa was limited to 65,000.27

The rising xenophobic attitudes that have arisen are reason for

apprehension. The following excerpt provides insight into this recent trend:

“The rising public anger about outsourcing, combined with persistent unemployment, residual fear from 9-11, and concern about immigration

forms a volatile mix that is ripe for demagogic activity by anti-foreign, anti-immigrant politicians and interests. For example, a former software

developer who lost his job in 2002 is running for Congress in Florida on an anti-outsourcing agenda. “This is hitting medical transcribers, financial analysts, radiologists, everyone,” he says. His slogan? “If you work at a

desk, beware – the foreigners are coming after your job.”28

The attitude reflected in the above quote has to be countered by providing

the U.S. public with the appropriate facts and statistics to counter this

growing xenophobic trend. Similar fear was prevalent during the late

eighties when Americans feared that Japan would control the global

technology sector.

Originally Congress passed the Immigration Act of 1990 to address the

critical U.S. shortages of engineers, scientists and other highly skilled

professionals. The authorized enactment increased the admission of foreign

nationals seeking permanent residential status in the U.S. To address the

high levels of unemployment among U.S. high tech professionals, in 2003

the U.S. government reduced the number of allotted H-1B visas from

195,000 to 65,000.

26 “L-1 Intracompany Transferee Visa,” American Immigration Network, http://www.usavisanow.com/l1visainfo.html.27 “USCIS Announces New H1-B Procedures – Reaches Cap,” U.S. Citizenship and Immigration Services, February 17, 2004, http://uscis.gov/graphics/publicaffairs/newsrels/h1bcap_NRrev.pdf.28 Brecher, J. and Costello, T., “Outsource This? American workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

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Many advocates against this legislative measure argue that rather than

protecting U.S. jobs the reduction in visas only further stimulated firms to

more rapidly offshore work. In addition, in an effort to create and maintain

jobs in the U.S., the AeA association (AeA is the nation's largest high tech

trade association, representing more than 3,000 companies) advocates giving

a green card to all foreign nationals holding a Masters and Ph.D. The

association states that given approximately 50% of the U.S. Doctoral and

Master’s degrees in the sciences, math and engineering are earned by foreign

nationals, the U.S. needs to provide incentives for these students to remain

in the U.S.

The American Engineering Association (AEA) holds the firm belief that

H1-B programs should be abolished in order to provide American

technology workers with jobs and appropriate wages. The following quote

summarizes the group’s beliefs:

“We are sending a message to our young people not to take technical careers, where they will be forced to compete against cheap foreigners, and making ourselves dependent on people with no intrinsic loyalty to us.  The entire H1-B program should be abolished, and the few authentic geniuses

out there should be brought in under other, existing programs."29

The Institute of Electrical and Electronics Engineers (IEEE), unlike the

AEA association, has proposed several reforms to the current H-1B Visa

legislation. The group advocates the following policy recommendations30:

Limit authorized stay in the U.S. to a single 3-year, non-renewable

term.

There have been growing complaints from labor representatives about

this issue, pointing out that as temporary workers have returned home,

29 Locke, Robert, “Why H1-B Visa’s are Bad for America,” FrontPageMagazine.com, January, 24, 2001, http://www.frontpagemag.com/Articles/ReadArticle.asp?ID=266730 “IEEE-USA Position Statement on the H-1B Visa,” IEEE-USA, February, 2003, http://www.ieeeusa.org/forum/POSITIONS/h1b.html

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they use their knowledge and connections in the U.S. market to

competitively bid for outsourced work.

Reform to facilitate the permanent admission of foreign professionals

with highly specialized knowledge and skills.

Provide green cards for foreign professionals to reside in the U.S.,

utilizing their brain power to bolster innovation and increase the

number of newly created jobs.

Mandate that all H-1B workers are paid a prevailing wage equivalent

to the median salary of similarly qualified U.S. workers.

Improve the H-1B program administration and statistical reports to

include the numbers of visa applications received/issued,

demographic information, etc.

Included with the complaints about immigrants are charges that displaced

American engineers and IT workers are being forced to train their L-1

visa replacements as a condition of their severance package. While these

issues have brought groups to Washington, D.C. to lobby their federal

representatives for policy change, there is great need for more

comprehensive data to support their claims about the widespread nature

of these practices and the magnitude of their impact on the American

workforce.

“Buy American” Provisions

Current law requires that product purchased by the Defense Department

contain 50% U.S. content. Duncan Hunter (R-CA), has attached legislative

language to this bill requiring products purchased by the defense department

contain 65% U.S. content.

Opponents of these measures, including AeA, respond to these provisions

with the following statement, “If U.S. federal, state, or local governments

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promulgate protectionist measures to deal with offshore outsourcing or other

issues, no industry will be more vulnerable to the likely retaliation than high

tech.” Opponents argue that foreign retaliation puts at risk $171 billion in

U.S. high-tech exports. Estimates from the Department of Commerce

illustrate that 5,000 people are employed for each $1 billion exported,

totaling 855,000 employees. In 2002, U.S. direct investment abroad in high-

tech manufacturing totaled $69 billion, while foreign direct high-tech

investment in the U.S. totaled $54 billion.31

The American Engineering Association (AEA) counters the foreign

retaliation theory proposed by AeA. The group debunks the theory that, ‘the

money that goes abroad in offshoring gets recycled back to the U.S. and

underscores the current half-trillion-dollar deficit between U.S. exports and

U.S. imports. In addition, the AEA report claims that foreigners don't have

to ‘recycle’ their dollars into buying job-creating exports from the U.S.32

Labor Law

Senator Tom Daschle (D-SD) has introduced legislation to expand the

Worker Adjustment and Retraining Notification (WARN) Act. The bill

requires companies that offshore 15 or more jobs to offer at least three

months notice of their intentions to offshore. In addition, the bill requires

the firms to notify the Department of Labor in order to facilitate a

statistically sound report regarding the offshoring of jobs. Given the lack of

available data to support a majority of the proposed policies concerning

offshoring, this bill is novel in its requirement for data collection. The

proposed legislation not only acknowledges but also offers one source for

gathering much needed data. Given the dearth of available data on which

decision making can be based at this time, much more effort should be 31 “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004, http://www.aeanet.org/GovernmentAffairs/zdutVvNoDmKUvpbAtBTPgKwYLyhyFec.pdf32Fletcher, Ian “20 Defenses of Offshoring and Why They Are Wrong,” American Engineering Association.

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dedicated to studying possible vehicles that would be most expedient for

gathering critical and comprehensive data.

Procurement

Senator Dodd (D-CT) has introduced a bill to prohibit federal contracts

from being performed offshore. Representative Jim Walsh (R-NY)

introduced the American Manufacturing Retention Act; this bill would

require federal contractors to have at least 50% of their workforce in the

U.S. In addition Senator Maxine Waters (D-NY), has introduced legislation

that would prohibit companies that have offshored jobs during the past five

years from receiving Federal funding (i.e. grants, contracts, loans).

Senator Daschle has also proposed a bill entitled Call Center’s Consumer

Rights to Know Act. The bill requires employees at a call center who either

initiate or receive telephone calls to disclose their physical location.

Taxation Issues

The nation’s system of taxation is also coming under increasing scrutiny.

John Kerry, Democratic Presidential candidate, is addressing taxation issues

in his campaign. Among his proposals are to change the tax structure on

income earned outside the country. This change is thought to have major

impact on large corporations heavily involved in offshoring. In addition,

Kerry proposes tax incentives for keeping business offices in the U.S.

Beyond the Kerry proposals, other taxation proposals are also under

consideration. These include:

Intellectual Property Export Tax

Fifteen years ago corporate taxes comprised 35% of the total federal tax,

whereas today corporate taxes comprise approximately 17%. Geo

Wiederhold in his presentation, “Outsourcing and IP” hypothesizes that the

decrease in corporate taxes results from the decrease in uncaptured IP.

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Subsequently, individuals, employees and Subchapter S corporations pay an

increasingly higher share of taxes. Wiederhold suggests that if the value of

IP exports could be captured, then corporations should pay taxes on the

value of these exports. This in turn may serve to slow the offshoring of

project critical technology. He further suggests that the net income from

these export taxes could serve to offset some of the national costs incurred.33

R&D Tax Credit

Several associations have lobbied for an R&D tax credit to encourage and

promote R&D investment activities in the United States. Integrated circuits,

the Internet, personal computers, and jet aircraft are just some of the many

examples of past technology advancements that were stimulated by federal

R&D. In order for the U.S. to remain technologically competitive the U.S.

must continue to invest in R&D.34 In addition, the American Electronics

Association (AeA) suggests increasing federal R&D spending in the

physical sciences, since recently funding has been disproportionably

allocated to the life sciences.35 While government investment in the physical

sciences was $5 billion, Intel Chief Executive Craig Barrett complained

about federal agriculture subsidies that he said were worth tens of billions of

dollars. He stated, “I can’t understand why we continue to pour resources

into the industries of the 19th century.”36

Education and Worker Retraining

33 Wiederhold, Geo, Lecture Notes: “Outsourcing and IP,” April 24, 2004. 34 “Creating and Economic Environment for Technological Competitiveness,” IEEE-USA, February 12, 1998, http://www.ieeeusa.org/forum/POSITIONS/compete.html35 “AeA Position Paper on Federal Offshore Outsourcing Legislation,” American Electronics Association, March, 2004, http://www.aeanet.org/GovernmentAffairs/zdutVvNoDmKUvpbAtBTPgKwYLyhyFec.pdf36 “Tech Chiefs Defend Overseas Jobs,” Wired.com, January 7, 2004, http://www.wired.com/news/business/0,1367,61825,00.html

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Many labor specialists say that the 2-year community colleges in the U.S.

should do much of the job of worker training, and that these institutions are

also an important educational resource for retraining people for a new job.

President George W. Bush, in his State of the Union address proposed a

$250 million dollar initiative for community colleges but by cutting federal

financing for other occupational education and job training programs at

community colleges by roughly the same amount, the White House’s budget

effectively undercuts Bush’s promises.

President Bush also proposed “personal re-employment accounts” last

year that would provide unemployed workers with approximately $3000

dollars to spend on training, education or counseling. The bill, with an

estimated cost of $3.6 billion never reached a floor vote. Wage insurance is

another idea advocated by some labor specialists as a means to provide

incentives for unemployed workers to more rapidly find new jobs.

Advocates for wage insurance believe that the most effective kind of

retraining is on-the-job education. Most proposals would pay half of the

difference between the old job and the lower paying new one. At the current

levels of unemployment, the wage insurance program would cost an

estimated $5 billion a year.37

37 Lohr, Steve, “U.S. politicians target disappearing jobs,” International Herald Tribute, February 24, 2004, http://www.iht.com/articles/130901.html.

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Some economists dismiss retraining as a solution to raising the income of

the dislocated worker or the working or jobless poor. For example,

University of Chicago economist James Heckman firmly believes that

training programs for more mature displaced workers, as well as remediation

programs for young adults with severe educational disadvantages have

negligible effect. Heckman states that investing in early childhood

education and K-12 schools makes sense since “…young persons have a

longer horizon over which to recoup the fruits of investment.”38

Federal Reserve Chairman Alan Greenspan told Congress in March, “…

that better education, not trade barriers, is key to preparing U.S. workers for

global competition.” A critical question should however be posed as to

whether better education will more effectively prepare U.S. workers? In

January, 2004 according to the most recent Labor Department data, there

were more unemployed workers 25 or older with college degrees than there

were unemployed workers without high school diplomas.39

Many groups, associations and government entities are working to

improve and reform the country’s K-12 educational system. One of these

groups, the Computer System Policy Project (an information technology

industry advocacy organization comprised exclusively of CEOs), is

outspoken in their belief that the future of American competitiveness is very

much reliant on the improvement in education and training of American

workers. The group’s white paper entitled, “Choose to Compete” states, “It

is imperative for business people and policymakers to work together to make

38 Globalization and Economic Development: Trade and Sustainable Development, CFED, Vol. 3, No. 8, September 2002, http://www.cfed.org/sustainable_economies/globalization/News/20020900GlobeTradevol3no8.html.39 Gangloff, Mark, “As more U.S. companies move jobs overseas, debate rages on answers to a divisive issue,” CNN.com, March 1, 2004, http://money.cnn.com/2004/03/01/news/economy/outsourcing_solutions/

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Americans understand a rigorous education in core academics and 21st

century skills is the key requirement for tomorrow’s jobs.”40

In addition, the group realizes that it’s impossible for the U.S. to retain

intellectual and business leadership without improvement in math and

science K-12 education. Businesses must not only assist with math and

science education funding, but also support and collaborate at the federal

and state level to assist in curriculum development and part-time teaching in

the K-12 classrooms.

Currently another group, Learning for the 21st Century Partnership whose

founding members include Microsoft, Dell, Time Warner, Cisco and the

National Education Association are working together to bring information

and technology literacy into the classroom. The Partnership hopes to serve

as a catalyst for change in the educational community.41

At the same time, state governments across the nation are grappling with

educational reform efforts. As the result of a major rewriting of the federal

K-12 law, schools across the nation are struggling to meet requirements of

the No Child Left Behind Act passed in 2002 that mandates them to make

annual yearly progress reports for all students Grades 3-8 or face major

sanctions. Schools whose students show no improvement are required by

this Act to take remedial action. Since the passage of the Act, there has been

a huge outcry from the educational community since schools across the

nation are in danger of failing to meet acceptable standards for passing the

required tests. Some critics complain of insufficient funding to support the

reform activities necessary while other critics view it as a federal intrusion

into state rights.42 40 “Choose to Compete,” Computer Systems Policy Project, 2004, http://www.cspp.org/reports/ChooseToCompete.pdf41 The 21st Century Learning Initiative, http://www.21learn.org/42 Dobbs, Michael, “More States are Fighting ‘No Child Left Behind Law’,” Washington Post, February 19, 2004, http://www.washingtonpost.com/wp-dyn/articles/A52720-2004Feb18.html.

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Some private foundations such as the Gates Foundation have attempted

to support reform efforts. With its small schools initiative, the Gates

Foundation has already dedicated over $373 million to supporting reform

efforts across the country.43 It is still far too early to gauge the impact of

reform efforts on our nation’s schools. It is already apparent, however, that

educational reform is an extremely complex process that will require long-

term commitment and major financial investment in order to increase the

probability of achieving its goals.

Untapped Labor Source: U.S. Prisons

“State governments and entrepreneurs are teaming up to ‘exploit’ prisoners, after all no one can undersell a worker who makes 41cents an hour without

additional compensation.”44

An Arizona state official recently stated, "In select industries where

America has lost jobs overseas, like shoes and textiles, you could bring these

jobs back." Currently, states are spending approximately $25 billion a year

on corrections. Approximately 1.1 million Americans are in prison today (in

1980 the number was 316,000); 3 out of every 100 American adults are in

prison or on parole or probation.

The American Service Friends Committee in Arizona has advocated

against prison privatization, arguing that companies are not currently subject

to the same laws as government regulated prisons, and therefore are immune

to the normal checks and balances that protect prisoners from abuse. An

excerpt from their public statement reads:

“There is an inherent threat to democracy when an institution with so much power over the lives of so many individuals is immune to any public

accountability. In addition, the social marginalization of inmates--the fact that most are poor and people of color--makes them ‘throw-away people’ in

43 Bill and Melinda Gates Foundation, Gates Foundation.org, http://www.gatesfoundation.org/Education/Grants/default.htm?showYear=2004.44 “Made in the USA….by Convicts,” http://lpa.igc.org/lpv24/lp3.htm.

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the eyes of many citizens. This lack of concern serves to invite abuse and neglect with little threat of consequences for the corporations. Our

experience with criminal justice work has taught us that abuses are less likely to occur in an environment in which there is a high degree of public

involvement.”45

The labor movement from its inception in the late 1800s protested the use of

convict labor to drive down U.S. wage levels; in fact, by the late 1890s

public opposition compelled many states to abolish the practice of prison

labor for profit. The Justice System Improvement Act of 1979 was the first

in a series of laws to loosen these regulations and allow prisons to put people

to work inside the prison confines. Future actions to affect policy on this

subject will merit monitoring as prisoners remain a population of interest in

offshoring labor discussions.

Environmental and Labor Protections

Politicians and public interest groups may appear to have dedicated more

time to protecting the rights of U.S. prisoners, rather than assessing the

factory labor conditions of foreigners hired by U.S. corporations abroad.

This situation is gradually changing as stories continue to surface about

labor conditions abroad. This paper would, therefore, be incomplete if it

failed to at least mention the groups and members of Congress in this

country who are trying to draw attention to global concerns regarding

offshoring. One of the many documents on this subject, a white paper

entitled, “Outsource This?” broaches the environmental concerns in stating,

“Our current industrial system is rapidly destroying the earth’s air, water,

land and biosphere. The reconstruction of the system of production and

45 “Privatization of Prisons,” American Service Service Committee: Arizona Program Area, http://www.afsc.org/az/prisonconcerns.htm

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consumption on an environmentally sustainable basis is both a necessity for

human survival…”46 and for the survival of earth itself.

Many of the nations to which work is currently being off-shored use

lower environmental and labor standards as part of their cost competitive

strategy. In looking at policy activity around this important area, it is

important to note that several associations and members of Congress have

recommended that all future trade agreements have labor and environmental

protections.

Conclusion

The issues surrounding offshoring are both complex and multi-faceted. It

is only through an attempt to gather more comprehensive data regarding

each of these issues that a range of comprehensive public policies can be

developed to adequately address each of the many different facets of this

highly complex phenomenon.

Unfortunately much of the comprehensive data that will be required to

study offshoring issues have yet to be carefully gathered. For example,

reliable statistical information about the current magnitude of global

outsourcing and its effect on national and international labor markets is

lacking. One important policy recommendation that is needed at this time is

to pool the resources of those parties expressing great interest in outsourcing

and its impact. These include educators, employers, government agencies,

labor unions and professional societies. By pooling sources of statistical

information from a wide variety of sources, it will then become possible to

compile a comprehensive data set that represents the contributions of many

46 Brecher, J. and Costello, T., “Outsource This? American Workers, the Jobs Deficit and the Fair Globalization Solution,” North American Alliance for Fair Employment, April 2004.

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broad-ranging perspectives. Only then can more definitive conclusions be

drawn on which to base informed policy decisions.

Appendix

Current Offshore Legislation47

47 “Offshore Outsourcing and Related Legislation: Current Federal Action,” National Conference of State Legislatures, March 18, 2004, http://www.ncsl.org/standcomm/scecon/04offshorefed.htm.

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27

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