Home .International Trade Offshoring -- you ain't seen nothing yet !
Offshoring -- you ain't seen nothing yet !
Thursday, 16 October 2008 10:04

Most economists are rather sanguine about the effects of offshoring, the outsourcing of production processes and activities to other countries.  It has always existed.  It is just another stage in the opening of our markets.  It allows us to exploit our comparative advantage.  And, in any event, don’t worry, the effect of offshoring on jobs is still very low, particularly compared with normal turnover in the labour market.

In a series of articles (see references below), Alan Blinder argues offshoring will not be a case of business as usual.  It will be a big deal!  Although to date, offshoring has not had major effects, we have barely seen the tip of the offshoring iceberg.  Information technology provides enormous potential for offshoring services.

Blinder takes us back to a distinction drawn by many trade economists, the distinction between tradable and non-tradable goods and services.  At any point in time, transport and communications technologies determine which goods and services are easy to trade internationally and which are hard or impossible to trade.  But, because technology and transportation improve over time, more and more items become tradable.  Many services are now tradable and many more will surely become so.

He distinguishes between two types of services.  First, there are personally delivered services, like those provided by a taxi driver, a barman, doctor, police officer, child care worker, nurse, psychologist, etc.  It is very difficult, at the moment at least, to offshore such services.  (There are some cases of personally delivered services which are tradable thanks to human travel, most notably tourism.)  Then there are impersonally delivered services in areas like call centres, keyboard data entry, radiology, laboratory tests, accounting and law, financial services, information services and so on.  Since these services are electronically deliverable, they are offshorable, and are indeed increasingly offshored.  They are destined to become perhaps just as tradable as manufactured goods.

The fraction of jobs that can move offshore will rise as technology improves and also as India and China continue to modernize, prosper and educate their workforces.  There will be very large adjustments as between 22 and 29 per cent of all US jobs could become offshorable within a decade or two.  Even if not all these jobs are in fact offshored, they will be exposed to international competition.  Traditionally we thought of service jobs as being immune to foreign competition, but this will be less and less the case.  This new offshoring will be like a new industrial revolution.

Most importantly, unlike in the past, these offshorable service jobs will not all be low-end jobs.  Indeed, there is little or no correlation between an occupation’s offshorability and the skill level of its workers.  It all depends on whether the services are personally or impersonally deliverable.

Protectionist pressure will likely be greater than in the past as more educated people are affected – they may be more able to organize opposition to open markets.  But, we should not surrender to protectionism.  This offshoring means a higher world productivity.  Also, it is extremely difficult to block electronic trade.  The US may need to provide better social safety nets to cope with this adjustment, and maintain support for open markets.

So, what else should governments do?  In the face of globalization, we have always recommended upskilling through more and more education.  In the future, the kind of education will be more important than the quantity.  We will need to focus education on high end jobs that are not offshorable.  People skills will be more valuable for personally delivered services than computer skills.  This may also lead to more job satisfaction, as human beings are social animals and enjoy human contact.  Also, creativity and imagination will be critical for creating new comparative advantages.

Who will be the winners of this new wave of offshoring?  Given its greater adjustment capacities, the US may cope better than Europe.  Further, the US may also gain as its fundamental comparative advantage is in innovation.  It will likely always be ahead of the pack, for both personally and impersonally delivered services, through its non-stop innovation.  Also, thanks to their English language skills, India and even the Philippines may provide bigger challenges than China whose globalization is focused on manufacturing.

So, what career for your children?  A plumber or a computer programmer?  An aerobics coach or an accountant?  If they make the right choice, they will not only end up more rich, but also more fit and healthy!

- Fear of offshoring, December 2005 -- http://www.princeton.edu/~ceps/workingpapers/119blinder.pdf

- Preparing America’s Workforce: Are We Looking in the Rear-View Mirror?, October 2006  http://ideas.repec.org/p/pri/cepsud/67.html

- How many US jobs might be offshorable ?, March 2007 http://www.princeton.edu/~blinder/papers/07ceps142.pdf

- Offshoring: Big Deal, or Business as Usual?, June 2007 http://www.princeton.edu/~blinder/papers/07juneCEPSwp149.pdf 

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