It has become commonplace to begin any discussion of Canadian-American relations with the inescapable fact that exports to the United States account for more than 85 percent of Canadian exports, which amounts to about 35 to 40 percent of Canada’s gross domestic product (GDP). Because of this basic fact, much of what matters in the bilat- eral relationship derives from the politics of trade in the United States, which changes as the process of globalization moves forward. This article looks into these changes and the rise of a new issue in the landscape of American politics: ”œoffshoring,” or the displacement of parts of a firm’s activi- ties to foreign locations, either through offshore outsourc- ing or offshore in-house sourcing.
For many, political resistance to offshoring is just anoth- er form of protectionism, and when we understand the issue formally, as economists are most inclined to do, that is what it is. Politically, however, the issue of offshoring sets off a dynamic that is different from traditional protectionism. Thus, what becomes increasingly crucial in determining the degree of openness or closure of the United States toward the world economy may be less a matter of the relative power and influence of industries or sectors and more a matter of broad- er attitudes toward the globalization of production.
The aim of this article is to probe political changes brought about by the deepening of the process of globalization in the United States. To do so I focus on the issue of offshoring. What is offshoring and how new is it? How can we sort out the facts from the hype? How politically salient is this phenome- non? What have been the legislative and policy responses so far? Finally, I discuss some of the potential effects of the off- shoring debate on Canada-US trade.
In addressing these questions, I note that offshoring is not quite the all- threatening destructive force portrayed by its most vociferous critics. It is, how- ever, sufficiently important to be considered seriously, and the political dynamic of response to this phenome- non is sufficiently different from the traditional patterns of trade politics to be worthy of attention, especially in a country that does 85 percent of its for- eign business with the United States.
The simplest definition of off- shoring is also the most politically expedient for opponents. It is the migration of jobs overseas or, just in case the immediate neighbours felt excluded, the migration of jobs beyond the borders. Offshoring is often synonymous with outsourcing but, following a recent report by the General Accounting Office, I distin- guish the two terms. Outsourcing means acquiring parts or services from an outside unaffiliated company (domestic or foreign). Offshoring refers either to parts or services sup- plied by a foreign affiliate of the home company (offshore in-house sourcing) or by an unaffiliated foreign-based company (offshore outsourcing).
Basically, the notion involves shifting parts of the production process to foreign locations, most often to take advantage of labour-cost differentials. On the face of it, this is not new: this has been going on for decades in the case of low-skill, labour- intensive manufacturing. No one with a basic knowledge of economics would dispute the logic behind this observa- tion by George Mankiv, the president’s Chief Economic Advisor, who claimed that ”œOutsourcing is just another way of doing international trade.” For economists, of course, this can only mean that offshoring is a good thing, since it should lead to the optimal allo- cation of production factors. Politically, however, the notion of exporting jobs overseas in the pursuit of higher profits is more problematic.
What makes this phenomenon rel- atively new is the fact that it affects a broad range of jobs that used to be con- sidered off-limits to the disrupting forces of international markets. Now, thanks to new technologies, service jobs such as data processing, call centres and software programming have become virtually rootless and are mas- sively shifted to low-cost countries. Moreover, what is significant is that off- shoring is creeping up the ladder from low-skill jobs to highly technical occu- pations, and even scientific work. To borrow a quote from Hewlett-Packard CEO Carly Fiorina: ”œThere is no job that is America’s God-given right anymore.” Because it generates insecurity in large portions of the American workforce, offshoring has become a highly salient political issue. As is the case with many an emerging issue on the policy agenda, however, this one is fraught with more than its share of myths and mispercep- tions. How much of the concern about offshoring is driven by fact and how much of it is fiction?
At the source of the recent rise of off- shoring on the national agenda is one basic fact: during the first Bush administration, 2.7 million manufactur- ing jobs were lost in the United States. Of course, this decline had already started in the waning months of the Clinton presi- dency. The overall decline in payroll employment was less severe (1.1 million jobs), and it would be unfair to attribute the totality of the lost jobs either to out- sourcing or even to the administration’s policies. Nonetheless, decline in employ- ment has fueled debate over the causes of job losses. In this context, just as the flow of cheap imports into the US has been in the past a driving force for the ”œold” pro- tectionism, the shifting of jobs overseas in areas hitherto shielded from world markets could easily give rise to a ”œnew” protectionism, or a backlash against globalization.
Aside from the general climate of job decline, much of the power of the off- shoring issue derives from the compelling ”” albeit mostly anecdotal ”” stories it allows its detractors to tell. For example, in cam- paign commercials and stump speeches that sought to take advantage of con- cerns about job losses from offshoring, Democratic presidential candidate John Kerry often used the striking image of workers packing their own equipment to ship it to another country where someone would take their place for a fraction of the salary.
What is the extent of job losses that can be attributed to offshoring? Some of the most pessimistic predictions announce losses of more than 3 million jobs specifically from this process over the next 15 years, or about 220,000 jobs annually. Of the more than 130 million jobs in the US economy, this represents less than 0.2 percent. This is not much, but what really matters is the broader sense of job insecurity that ensues. In turn, this yields fertile ground for inter- est groups lobbying either for specific responses to this new phenomenon or for their own ”œold fashioned” protec- tionist causes. In the battle for the minds of insecure voters, compelling anecdotes are far more effective than statistics.
One of the favourite claims of those promoting an assertive policy response to offshoring is that it may be, in some cases, encouraged by tax loop- holes. There is some truth to this claim, and even the conservative Wall Street Journal has concurred. Most of the tax provisions that tend to facilitate off- shoring are not new, however. Also, this argument tends to neglect the strategic dimension of the problem. If the United States changes its tax codes to address this issue, there is little its gov- ernment can do to prevent other coun- tries from adjusting their own regulations to regain the winning edge.
Thus it may be harder than it seems to devise a stable solution to this problem. One of the possible consequences of offshoring is that it might reduce the upward pressure on wages in high-skill, high-technology occupations. In recent years, many of these occupations were relatively shielded from international competition. The logic is similar to the rents incurred by producers in sectors protected from international competi- tion by tariff or non-tariff barriers. What is politically different is that, in contrast with trade competition from foreign firms, offshoring unlocks the common bond of interest between workers and capital owners. Of course, multinational firms have always relied on some form of global sourcing. What is new is the scope of the options now available to firms as technology exposes almost every link in the design, production and marketing chain to increased competition from low-cost areas.
Finally, the debate over offshoring tends to downplay the jobs that are ”œinshored,” or moved into the United States by US-based affiliates of foreign multinationals. On this front, the news is rather good. Data from the US Bureau of Economic Analysis show that the number of such jobs more than dou- bled between 1987 and 2002, from 2.6 million to 5.4 million. These US sub- sidiaries employ higher-skilled workers, they pay higher wages, and ”” common perceptions notwithstanding ”” they employ a larger share of unionized workers than domestic companies. The US attracts a large share of the research and development operations of global firms, thus putting an even greater pre- mium on specialization and high-level skills. In the real world of American pol- itics, however, jobs lost through the conscious decisions of domestic managers weigh far greater than jobs gained through decisions made by foreigners.
The breadth of the pool of workers that may be affected by offshoring makes it a potent political issue in times of economic uncertainty. In the 2004 election campaign, Democrats were prompt to seize the opportunity to connect with large numbers of inse- cure workers, but the context was not favourable to making this issue stick in the minds of voters. In the end, job insecurity was not enough to lift John Kerry’s campaign, as voters’ concern for terrorism and Iraq overshadowed bread-and-butter considerations.
Although the economy and jobs were not upfront and centre in the voters’ minds in 2004, they may regain the edge in the future. Indeed, the American public has ambiguous opin- ions about international economic openness. Although most people approve of open trade, this support is thin and people easily shift to mercan- tilist positions when probed by poll- sters. Even when the American economy was going well, in the 1990s, public support for open trade was declining. By contrast, when it comes to their actual behaviour as con- sumers, even those who declare a will- ingness to make some sacrifice on price in favor of domestic suppliers sel- dom pay much attention to the provenance of the products or services they buy. The same applies to offshored services. In May 2004, an Associated Press poll found that 69 percent of Americans believe offshore outsourc- ing hurts the US economy.
Apart from direct contact with call centres located in faraway places, which often elicit complaints from dissatisfied customers, few people take notice of the amount of services per- formed offshore when they choose a bank, an insurer, or a credit card company. In sum, while US consumers are among the most steadfast allies of free trade and open markets, US voters are not always as reliable, even if they happen to be the same persons.
Although voters did not react sig- nificantly to the economic issues raised by the Kerry campaign, of which outsourcing was a major theme, this does not mean that the issue will dis- appear from the agenda. Indeed, throughout the year 2004, this issue remained present on the minds of leg- islators and there was a surge of leg- islative activity both in the Congress and in state legislatures. At the federal level, at least five proposals have been considered in 2004. These proposals range from restrictions on federal con- tracts that would outsource major por- tions of their work outside the United States, to laws requiring companies to be more transparent about the local- ization of their workers and subcon- tractors, to a bill that would require all American flags sold in the United States to be made in the United States. At the state level, 35 of the 50 states have recently introduced legislation to regulate offshoring along similar lines. In fact, if we also consider recent state- level initiatives to introduce new legis- lation regulating access to public markets with various kinds of ”œBuy American” laws, states may become increasingly important suppliers of protectionist policies ”” either of the old or the new kind. Although Democratic candidate John Kerry was a vocal critic of offshoring during the last presidential campaign, and although his typical stump speech sounded more protectionist than his opponent’s (who largely ignored the subject), the Bush administration so far has been inclined to bow to protec- tionist pressures, a fact that Canadian exporters are acutely aware of.
When it comes to the actual poli- cy response against offshoring, parties also do not seem to matter a great deal. In different states, similar legislation has been introduced by members of either party, whose rhetoric tends to converge. Whether and when these proposals will make their way into the law books is unclear, but redistributive issues arising from the globalization of production are changing the landscape of US trade politics, with potential adverse consequences for Canada.
To most Americans, Canadians are good neighbours who ”” whether they assertively oppose or enthusiasti- cally support the United States ”” attract little attention. Canadians often com- plain about this constant feature in the bilateral relationship but, in the case of the offshoring debate, they might be better advised not to. Few studies have documented precisely the impact of off- shoring by US companies on Canadian employment, but it is substantial and growing rapidly. Although Canada, like the United States, tends to be vulnerable to offshoring to low-cost countries, it also has been a major beneficiary of US outsourcing. For example, there are more than 25,000 call-centre ”œagent positions” in Canada servicing the United States, a figure that should grow at an annual rate of 12 percent in the next three years. On the higher end of the service export scale, a recent study showed that about 20,000 Canadians develop software for foreign companies. The outsourcing of film and television production also has become a major industry north of the border. For US firms seeking to shave off some labor costs without incurring the risks of more exotic business environments, Canada is a logical, safe choice. Although the sharp drop of the US dollar has not com- pletely stopped the tide of outsourcing to Canada, it has put a large dent in its competitive edge and made it more vul- nerable to changes in US policy.
In this context, the current debate over outsourcing in the United States could have adverse effects on Canada on two different but related levels. First, obviously, policies intended to put reg- ulatory obstacles in the way of off- shoring would directly affect Canadian jobs dependent upon service and other exports to the United States. If, howev- er, obstacles to global offshoring (notably the risk factor of moving oper- ations to third-world countries) were to fall dramatically, Canada might also lose some of its competitive edge to low-cost countries such as India or Singapore. Canada thus benefits from the current mixed situation, where US firms seeking to offshore parts of their operations face few formal obstacles, but significant risk and other intangible obstacles still limit the attractiveness of low-cost countries.
Second, the outsourcing debate might affect Canada more indirectly, but perhaps more adversely, via its impact on the overall political climate surrounding trade and international economic policy in the United States. Studies of American public opinion on international economic issues suggest that although a majority of the public still supports international trade, this support has eroded in the 1990s in spite of the strength of the US econo- my. In this context, few politicians, and certainly not the current occu- pant of the White House, have been willing to take much political risk in standing up against protectionism of any kind. The president’s decision to impose prohibitive tariffs on steel imports while his popularity rating stood at a stratospheric 85 percent, and his steadfast unwillingness to budge on the bilateral trade irritants that remain with Canada ”” namely beef and softwood lumber ”” are strong indications that political winds do not blow in a favourable direction from a Canadian perspective.
The debate over offshore outsourc- ing is but one manifestation of the effect of globalization on American trade politics. As the process of global- ization moves forward, resistance to fur- ther liberalization becomes less a matter of the interplay of interests among industrial sectors, and more a matter of broad-based attitudes toward globaliza- tion. In this context, specific interest groups are likely to seize any opportunity to seek protection by exploiting these prevailing attitudes, while weary politi- cians may be increasingly unwilling to stand up to these pressures.
Thus the future of the Canadian- American economic relationship is likely to be affected by the evolution of prevailing attitudes in the United States on globalization. In the past, attitudes toward trade liberalization in the United States were generally favourable, and particularly so among more educated citizens and the elite. As globalization makes more and more jobs vulnerable to foreign competi- tion, creating economic insecurity for an ever larger portion of the middle class, whether that will remain the case is an open question.