Category Archives: Outsourcing

Crook on Blinder

Clive Crook:

Lately, though, Mr Blinder has been emphasising the downside. Perhaps he has found this arouses more interest. At the moment, as the title of his newest article indicates, he is anxious more than excited. “These forces,” he points out, “don’t look so benign from the point of view of an American computer programmer or accountant”, whose job might be at risk from foreign competition for the first time.

That is true, but how benign did those forces look to factory workers 20 years ago? Do accountants have larger claims on our sympathies than steel workers? Mr Blinder used to argue that trade creates jobs as well as destroying them and raises living standards in the process. He used to say that growing imports imply growing exports. He noted the age-old error of thinking that trade raises unemployment and said it was called the “lump of labour” fallacy. Those arguments were correct then and, in Mr Blinder’s view, still are. So, again, what has changed?…

In short, when it comes to policy prescriptions, Mr Blinder’s big new view amounts to nothing. Perhaps understanding this, he defends his grave new stance as constructive from a rhetorical point of view. He says he wants to save free trade from itself. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.” Yes, that is always a risk. But is it really going to be more effective to chant “you’re right, free trade is bad for you”?

Let me suggest another approach. Keep on patiently explaining why, implausible as it seems to non-economists, liberal trade in goods and services really is good for importers and exporters alike. Explain why, odd as it may seem, offshoring really is no different. Keep arguing for policies that widen the gains and help the victims, to be sure, but never concede those main points, or suppose they do not need defending. No question, it is thankless and repetitive work, but until it can be offshored, we need Alan Blinder to pull his weight.

More along that line here.

Trade in Tasks: Logistics

FT:

Retailers and consumer goods companies in the developed world are increasingly shifting logistics operations from their home countries to China. Goods are sorted, labelled and even placed in displays for direct shipment to individual stores before leaving Chinese ports.

Shipping lines, logistics companies and warehouse operators say costs spur customers to move the sorting process away from consuming countries, continuing the outsourcing trend to lower-wage economies that began with manufacturing going to China.

Globalization & Disaggregation

The Economic Council of Finland published a number of papers on globalization last week. Here’s the summary of the lead article by Richard Baldwin:

Three eminent economists from Princeton University have recently argued that globalisation has entered a new phase that requires a new paradigm understand. This paper examines what is new in the new paradigm and considers the policy implications for Europe. Roughly speaking new-paradigm globalisation differs from the old in that it is occurring at a much finer level of disaggregation. Due to radical reductions in international communication and coordination costs, EU firms can offshore many tasks that were previously considered non-traded. This means that international competition – which used to be primarily between firms and sectors in different nations – now occurs between individual workers performing similar tasks in different nations. The really new feature is that deeper new-paradigm globalisation will seem quite unpredictable from the perspective of firms and sectors. Since individual tasks can be offshored, globalisation may help some workers in a given firm while
harming others. Moreover, old-globalisation’s correlation between skill groups and winners and losers breaks down. Certain highly skilled tasks may turn out to be offshore-able, while other highly skilled tasks are not. Increased offshoring will therefore not systematically help or hurt skilled workers in the EU. In particular, many “Information Society” jobs are prone to offshoring so EU policies aimed at moving workers into Information Society jobs may be wasted since those jobs are only ‘good jobs’ because they do not yet face direct international competition. The paper argues that this has important implications for the EU’s competitiveness strategy, education strategy, welfare states, and industrial policy. The underlying theme is that the increased unpredictability should make EU leaders more cautious about moving workers or skills in a particular direction. Flexibility is, as always, the key to allowing Europe to seize the opportunities of globalisation while minimizing the adjustment costs.

The three economists at Princeton cited by Baldwin are Gene Grossman, Esteban Rossi-Hansberg, and Alan Blinder. The two Grossman and Rossi-Hansberg papers on offshoring are available at Grossman’s website. Blinder’s article is his March Foreign Affairs article, with which most readers of this blog are probably familiar.

Medicine, Outsourcing, and Cartels

NYT:

Frank Levy, an economist at the Massachusetts Institute of Technology,… teamed up with two other MIT researchers, Ari Goelman and Kyoung Hee Yu, and they dug into the global radiology business. In the end, they were able to find exactly one company in India that was reading images from American patients. It employs three radiologists. There may be other such radiologists scattered around India, but Levy says, “I think 20 is an overestimate.” …

To practice medicine in this country, doctors are generally required to have done their training here. Otherwise, it is extremely difficult to be certified by a board of other doctors or be licensed by a state government. The three radiologists Mr. Levy found in Bangalore did their residencies at Baylor, Yale and the University of Massachusetts before returning home to India.

“No profession I know of has as much power to self-regulate as doctors do,” Mr. Levy said.

So even if the world’s most talented radiologist happened to have trained in India, there would be no test he could take to prove his mettle here. It’s as if the law required cars sold here to have been made by the graduates of an American high school.

From the paper by Levy and Goelman:

One could imagine international agreements that allowed radiologists credentialed in one country to practice in another. In fact, no such agreements exist for radiologists practicing in the United States, a reflection, in part, of U.S. doctors’ group power. U.S. radiologists’ power to restrict foreign competition is reinforced by malpractice insurance, Medicare reimbursement regulations, and in all likelihood, consumer preference. Software professionals have few of these protections and so face strong foreign competition. [Levy & Goelman (pdf)]

I believe it was Milton Friedman who described the AMA as the country’s most successful cartel.

Indian-Americans score jobs

Interesting tidbit in the Hindu Business Line:

Guess what Ashok Leyland’s Managing Director, Mr R. Seshasayee, believes to be the company’s most formidable challenge? Getting skilled engineers. “There is a dearth of engineers for the middle and senior levels,” he told Business Line. But that the company for sure has a plan to meet the challenge. “Our team is going to the US this summer to recruit engineers,” he said.

A Word on Greenspan’s CAFTA Comments

I just caught a replay of Alan Greenspan’s Wednesday testimony before the House Financial Services Committee. As Bill Day of Business Express complained, much of the discussion wasn’t enlightening. I just want to comment on one exchange.

Rep. Maxine Waters, in the briefest terms, asked: CAFTA will increase outsourcing. Is outsourcing good or bad?

Chairman Greenspan chose to reply by defending outsourcing as efficient and desirable. In doing so, he granted Waters’ premise. But there are good reasons to believe that CAFTA will not affect, or perhaps even reduce, outsourcing!

CAFTA primarily lowers the other nations’ barriers to US exports, not US barriers to theirs. Most of the six other nations’ exports already have duty-free preferential access to the US market under the Caribbean Basin Trade Partnership Act program. As such, CAFTA won’t introduce any new competitive pressures upon US import-competing industries. It will, however, reduce incentives for US companies to establish factories in CAFTA countries in order to circumvent (pre-CAFTA) trade barriers by allowing the US corporations to freely export their goods to the Latin American nations.

It’s silly how anti-globalizers try to impose all of their arguments upon every trade deal. CAFTA is a fairly narrow agreement that opens up Latin American markets to US exports. It doesn’t encourage outsourcing, doesn’t significantly reduce American tariffs, and doesn’t lower labor standards in our partner countries. Those that oppose free trade are using CAFTA as a proxy for globalization as a whole, ignoring that their complaints have little relevance to CAFTA itself.

[That said, I still oppose the deal, because it’s a preferential agreement that will do more harm than good.]