Tech Industry

The truth about offshoring

CNET's Declan McCullagh says a senior Bush adviser was only speaking the truth when he inadvisably stated that free trade is good for America and for its tech industry.

Economic reality frequently makes for poor politics.

That's what N. Gregory Mankiw, chairman of President Bush's Council of Economic Advisers, recently found out when he inadvisably spoke the truth: Free trade is good for America.

Outsourcing gains "that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane," Mankiw, who is on leave from his job at Harvard University, told Congress. "When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically."

Mankiw was restating for the 21st century the economic law of comparative advantage, which essentially says that nations should play to their strengths. No serious economist would disagree. But Mankiw soon learned a lesson: Better to cloak what you say in fuddy-duddy academic argot than to be clear and controversial.

Soon a typical Washington tempest began swirling. Democrats seized on Mankiw's remarks as a way to paint Bush's advisers as out of touch, especially when jobs in America's information technology industry are seen as vulnerable to offshore outsourcing in China and India.

Remarks likening CEOs to traitors may play well in the primaries, but how close are they to the realities of technology companies that must compete globally?
Last week, presidential candidate John Kerry railed against "Benedict Arnold CEOs" who are "shipping American jobs overseas." Fellow contender John Edwards is even more hostile to free trade.

Remarks likening CEOs to traitors may play well in the primaries, but how close are they to the realities of technology companies that must compete globally?

Consider what would happen if Congress restricted companies from shifting jobs overseas. Because rivals in Europe, Japan and Korea could employ cheaper workers in developing nations, they'd have a leg up on U.S. firms. Foreign investors would recognize that rising protectionism makes U.S. companies less competitive and would choose to take their yen and euros elsewhere, driving down the U.S. stock market, shrinking available capital, and eventually leading to more unemployment than if Congress had done nothing.

It is true that America has lost jobs in the last three years, and the technology sector has been harder-hit than many others. But the job loss has not been as huge as some politicians and news reports would have you believe. America's unemployment rate currently is around 5.7 percent, not especially high by historical standards, and among the lowest in the world. It's certainly the envy of France (9.3 percent), Germany (9 percent), and Canada (6.8 percent).

Just as candlemakers and farriers lost their jobs a century ago, free trade results in temporary disruptions. But in the long run, free trade is vital to a society's overall health. In the 1990s, developing countries hostile to foreign trade experienced average growth rates of negative 1.1 percent per year, while developing countries that embraced freer trade enjoyed growth of positive 5 percent annually.

And let's not forget that U.S. workers in the information technology industry often benefit from outsourcing. The German company Siemens, which makes electronic and electrical products, employs 65,000 people in this country. Sony Electronics employs 2,000 people in just New Jersey, while Belgium's Agfa-Gevaert Group, one of the world's leading imaging companies, writes paychecks to over 5,000 people in the United States. Spain's Terra Lycos employs 418 people in the United States to run Web sites such as,,,, and And those are only a few examples.

Mankiw put it not so gracefully albeit succinctly: "It is natural to ask what new jobs will be created in the future. Policy makers should create an environment in which businesses will expand and jobs will be created. But they should not try to determine precisely which jobs are created or which industries will grow. If government bureaucrats were capable of such foresight, the Soviet Union would have succeeded as a centrally planned economy."

The next act in this political drama will take place Wednesday, when Federal Reserve Chairman Alan Greenspan is before the House Budget Committee. Look to him to recite unemployment figures and discuss offshore outsourcing, but not to be snared in embarrassing missteps. Unlike Mankiw, Greenspan has been around town long enough to appreciate the difference between political reality and the truth.