"Outsourcing" or "offshoring," a term used to describe transfer of jobs from the United States to cheaper labor markets, is a hot-button topic this year. Politicians and media sources call it the root cause of the jobless economic recovery. But is it? A simple case study will help illustrate the complex links among outsourcing, free trade, jobs and standard of living.
Let us say I invest a few million starting up the Fountain Square Pen Co. to manufacture ballpoint pens in Cincinnati. I employ 25 U.S. workers at a cost of $15 an hour, factoring in a living wage, health insurance, taxes and benefits. Adding the cost of raw materials, if they produce a million pens a year, each pen costs $1.
Enter a company in China, which, having very low labor costs due to weak labor law enforcement and a favorable currency exchange rate, is willing to supply a million pens at 10 cents each. For Fountain Square Pens to survive, either the cheap Chinese pens must be prevented from reaching the Cincinnati market by tariffs or outright import bans, or Fountain Square Pens must close the local plant and open a Chinese factory to be competitive.
If the cheap import of Chinese pens is banned, then hundreds of thousands of Americans will have to pay $1 for a pen. Expenses for office products would soar and local companies would be less competitive. The only people to benefit would be the 25 workers who still had jobs.
If free import is allowed, then the 25 U.S. workers are out of a job, but a million Americans have cheap pens. This means U.S. companies can spend $900,000 on other things to stay competitive, such as retraining, new phones or printers. And many jobs will be created providing those services.
If a U.S. company manufactures any product while the same product can be imported for a fraction of the cost, the company will not survive. Outsourcing cannot be stopped without also closing the U.S. market. But if the markets are closed, the standard of living will plunge because prices would soar.
If free trade is allowed without labor protections for foreign workers, then sweatshops will produce goods with ever-cheaper prices, but there will be a shrinking pool of employed people in the United States who can afford even those cheaper prices.
One strategy to prevent this is to lower the U.S. dollar exchange rate to a third of current value. Imported goods would cost three times as much, giving local manufacturers a fighting chance. Another strategy is for the United States to push for better pay and working conditions in all countries. Otherwise, the future for U.S. workers is bleak.
Ganesh Balasubramian of Clifton is a senior engineer with the Greater Cincinnati Water Works, and also has worked as an engineering consultant. This column represents his views, not those of his employer.
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