Friday, September 23, 2005
[IWS] CRS: Foreign Outsourcing: Economic Implications and Policy Responses - Update 21 June 2005 (online 21 September 2005)
IWS Documented News Service
_______________________________
Institute for Workplace Studies Professor Samuel B. Bacharach
School of Industrial & Labor Relations Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor Stuart Basefsky
New York, NY 10016 Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Foreign Outsourcing: Economic Implications and Policy Responses
Updated June 21, 2005
Craig K. Elwell
Specialist in Macroeconomics
Government and Finance Division
http://opencrs.cdt.org/rpts/RL32484_20050621.pdf
[full-text, 28 pages]
Summary
Foreign outsourcing--the importing of some intermediate product (i.e., a portion
of a final product or some good or service needed to produce a final product) that was
once produced domestically--is not a new phenomenon, nor is it one that is
economically distinct from other types of imports in terms of its basic economic
consequences. A steadily rising level of trade in intermediate products is one of the
salient characteristics of U.S. trade and world trade for the last 30 years. It has been
estimated that as much as a third of the growth of world trade since 1970 has been
the result of such outsourcing worldwide. While foreign outsourcing may seem
different from traditional notions of trade in that it involves exchange of a productive
resource (capital or labor) rather than an exchange of a final good and service, the
ultimate economic outcome is exactly the same: a net increase in economic efficiency
through the elimination of economic inefficiencies that occur when countries use
only the productive resources found within their borders. This gain is not likely to
be achieved, however, without causing costly disruptions for the particular workers
and sectors tied to the now-imported good.
Foreign outsourcing, trade in general, and trade deficits tend to change the
composition of total output and the composition of total employment, but it is
unlikely that economy-wide they lead to any change in the overall level of either.
In some areas of the economy output falls and jobs are destroyed, but in other areas
output is increased and jobs are created. There are two complementary reasons for
this. First, the Federal Reserve using monetary policy can set the overall level of
spending in the economy to a level consistent with full employment. With aggregate
spending at the right level, full employment is possible with or without outsourcing,
trade deficits, or trade in general. Second, according to basic economic principles
any increase in the demand for an import will also lead to adjustments in the foreign
exchange market that will induce an equal increase in the demand for the country's
exports of goods or assets. The positive stimulus to employment of the increased
export of goods is direct, that of the increased export of assets is indirect, but both
tend to create jobs in other parts of the economy. Indirect evidence of this inherent
"two-way" nature of trade and that increased outsourcing over the last 30 years has
not likely led to a significant net diversion of employment or output abroad is found
in the relatively stable patterns of employment and output between the domestic
parent and foreign affiliates of U.S. multinational corporations. In addition, there is
evidence of sizable foreign outsourcing to and job creation in the United States.
The destructive aspects of foreign outsourcing are costly and distressing to
those whose jobs are lost to increased imports. Therefore, matters of efficiency and
equity are intertwined and one of the principal challenges for policymakers in the
face of foreign outsourcing (and trade in general) is to find ways to ameliorate the
associated harm, without sacrificing the economy-wide gains that such trade
generates. Compensation for loss and adjustment assistance is thought by economists
to offer the best chance for securing higher economic efficiency along with
distributional equity. This report will be updated as events warrant.
_____________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky *
Director, IWS News Bureau *
Institute for Workplace Studies *
Cornell/ILR School *
16 E. 34th Street, 4th Floor *
New York, NY 10016 *
*
Telephone: (607) 255-2703 *
Fax: (607) 255-9641 *
E-mail: smb6@cornell.edu *
****************************************
_______________________________
Institute for Workplace Studies
School of Industrial & Labor Relations
Cornell University
16 East 34th Street, 4th floor
New York, NY 10016
________________________________________________________________________
Congressional Research Service (CRS)
Foreign Outsourcing: Economic Implications and Policy Responses
Updated June 21, 2005
Craig K. Elwell
Specialist in Macroeconomics
Government and Finance Division
http://opencrs.cdt.org/rpts/RL32484_20050621.pdf
[full-text, 28 pages]
Summary
Foreign outsourcing--the importing of some intermediate product (i.e., a portion
of a final product or some good or service needed to produce a final product) that was
once produced domestically--is not a new phenomenon, nor is it one that is
economically distinct from other types of imports in terms of its basic economic
consequences. A steadily rising level of trade in intermediate products is one of the
salient characteristics of U.S. trade and world trade for the last 30 years. It has been
estimated that as much as a third of the growth of world trade since 1970 has been
the result of such outsourcing worldwide. While foreign outsourcing may seem
different from traditional notions of trade in that it involves exchange of a productive
resource (capital or labor) rather than an exchange of a final good and service, the
ultimate economic outcome is exactly the same: a net increase in economic efficiency
through the elimination of economic inefficiencies that occur when countries use
only the productive resources found within their borders. This gain is not likely to
be achieved, however, without causing costly disruptions for the particular workers
and sectors tied to the now-imported good.
Foreign outsourcing, trade in general, and trade deficits tend to change the
composition of total output and the composition of total employment, but it is
unlikely that economy-wide they lead to any change in the overall level of either.
In some areas of the economy output falls and jobs are destroyed, but in other areas
output is increased and jobs are created. There are two complementary reasons for
this. First, the Federal Reserve using monetary policy can set the overall level of
spending in the economy to a level consistent with full employment. With aggregate
spending at the right level, full employment is possible with or without outsourcing,
trade deficits, or trade in general. Second, according to basic economic principles
any increase in the demand for an import will also lead to adjustments in the foreign
exchange market that will induce an equal increase in the demand for the country's
exports of goods or assets. The positive stimulus to employment of the increased
export of goods is direct, that of the increased export of assets is indirect, but both
tend to create jobs in other parts of the economy. Indirect evidence of this inherent
"two-way" nature of trade and that increased outsourcing over the last 30 years has
not likely led to a significant net diversion of employment or output abroad is found
in the relatively stable patterns of employment and output between the domestic
parent and foreign affiliates of U.S. multinational corporations. In addition, there is
evidence of sizable foreign outsourcing to and job creation in the United States.
The destructive aspects of foreign outsourcing are costly and distressing to
those whose jobs are lost to increased imports. Therefore, matters of efficiency and
equity are intertwined and one of the principal challenges for policymakers in the
face of foreign outsourcing (and trade in general) is to find ways to ameliorate the
associated harm, without sacrificing the economy-wide gains that such trade
generates. Compensation for loss and adjustment assistance is thought by economists
to offer the best chance for securing higher economic efficiency along with
distributional equity. This report will be updated as events warrant.
_____________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 5:50 AM
