February 2007
PERI co-director Gerald Epstein and James Burke recently published a working paper, Bargaining Power, Distributional Equity and the Challenge of Off-Shoring. Professor Epstein answered some questions posed by PERI's communications director, Debbie Zeidenberg, on the affects of offshoring on the well-being of workers and others in the country exporting its jobs and in the country where those jobs land.
As your paper makes clear, there is ample evidence that increasing offshoring is giving rise to declines in manufacturing employment in this country, and that multi-national corporations (MNCs) are not reinvesting their profits in domestic expansion which might increase jobs in the U.S.. This seems sadly logical—if MNCs have found offshore production to be more profitable, why would they target their expansion to this country? You describe this as an ‘optimistic scenario,’ but what inducements might make it more likely to occur?
To answer your question, we need to delve briefly into a little trade theory and history. The mainstream theory of international trade is based on the so-called "law of comparative advantage" which goes back at least as far the early 19th century when British former stock broker David Ricardo developed this elegant argument. This 'law' states that all countries have some sets of industries in which they can be very competitive on global markets. So, even if it is more profitable to produce textiles in China – causing U.S. investment to flow to China to build textile factories – the U.S. would be more competitive in other industries, such as high tech services. As trade develops, the industries in which the U.S. is competitive would expand and would become good destinations for investment (and employment generation). However, something seems amiss with this process in the U.S. While labor-intensive manufacturing and service production is moving abroad, there does not seem to be a big expansion going on in other, employment-generating sectors in the U.S. that would utilize these profits.
A big question is how to capture some of these profits from offshoring and reinvest them into real investments in the U.S. that will generate both more jobs and higher productivity. What is often left out of the discussion is the role of public investments in education, infrastructure, research and development, and health. In order to capture some of these profits for these kinds of investments, the U.S. government, at all levels, needs greater ability to tax and re-invest these profits. That is being undermined by the same globalization processes that are driving offshoring.
One side effect of offshoring you discuss is that displaced workers have little or no bargaining power, and hence can do little to affect government policies that might reverse these trends. Does the opposite happen in host countries? In a country that sees significant numbers of outsourced jobs, does pressure on the employment market drive the bargaining power of workers up, resulting in higher wages and greater political power among the working class?
This is an excellent question. I don't think there has been enough research done on this question to have a definitive answer, but there should be! I think the impacts on workers and communities in the "host" countries are very context specific, depending on the economic, political and legal conditions there. There seems to be some evidence that in some places, ‘skilled’ workers have benefited more than ‘unskilled’ workers from these processes. And in some situations, young female workers, for whom outsourced jobs have provided opportunities to escape oppressive relations or impoverishment at home, have found improvements in their conditions. But, I don't think there is evidence that the impacts so far in most places have been large enough, or sustained enough to have major impacts on the general bargaining power of groups of workers there. But, as I said, much more research needs to be done on this really important topic.
On a related note, you say that MNCs prefer to invest their profits abroad rather than at home, in large part because of the tax advantages. Do these investments in host countries have any positive impact on socially-desirable spending in those countries? Does this influx of foreign capital in any way benefit the local economy, or do these investments tend to be structured in ways that minimize interaction with the local economy?
There is a huge literature on the impacts of MNCs on developing countries and the results are quite mixed. An important distinction is whether MNCs build new factories, or whether they just take over old ones. The former is likely to have greater benefits. MNCs tend to pay higher wages than local firms, so that's a plus; but they also do not tend to transfer much new technology to local economies. Moreover, they often take their profits out of the country to return it to shareholders or send it to other low tax havens. There is some evidence that, particularly in developing countries, MNCs in some sectors are also guilty of helping to corrupt local officials and contribute to various environmental problems. Overall, it is quite a mixed bag, and once again, is likely to be quite country specific. One important determinant of country variation is the power of the national government to manage and extract concessions from MNCs so that they are more likely to benefit the local economy.
Offshoring is not a new phenomenon—the current trend is at least forty years old. Are there examples of past international agreements, or less formal arrangements, that have been more successful in distributing the benefits of offshoring than what we see today?
While it is true that offshoring is not new, it is accelerating, and moving into services in a way it has never before. This has been accelerated not only by new technologies that have made offshoring both in manufacturing and the service sector more practical, but also by changes in national policies by developing countries designed to attract such activity. This ‘liberalization’ and ‘globalization’ has attracted more of this activity, and also reduced the ability of countries to regulate and direct it to enhance the benefits that spill over to domestic business, workers and communities. In the bidding process to attract more foreign investment, including offshoring businesses, developing countries have signed various bi-lateral, regional and international trade agreements, including joining the WTO and the NAFTA, that often restrict regulations that can be imposed by developing country governments on MNCs. While this might have some impact on attracting investment, it reduces the benefits countries can get from them once they are there. This is in contrast to other countries, such as Korea, Taiwan, and Malaysia that, to some extent, were able to use strong government regulations to extract benefits from MNCs (such as licensing of new technology, or requirements that they use domestic inputs to create markets for local firms), including those engaging in offshoring.
You argue that corporate tax reform might allow governments to retain funds that could be used for social and educational programs that enhance the bargaining power of U.S. workers. But as we watch higher- and higher-skilled jobs get exported, what social investments can we make that will successfully compete with the lower wages and more lenient labor laws that MNCs consistently find overseas?
Most commentators and economists talk about the need to significantly improve education in the U.S. at all levels, and especially k-12, so that U.S. residents are much better educated. This is clearly necessary, but of course it is not a panacea. Increased public investment in education, health, and infrastructure has the potential to create significant numbers of local jobs, and those could be jobs with living wages. So you would benefit both on the input and the output side. Add to that the development and implementation of alternative energy sources, which could also generate many good U.S.-based jobs if it is done properly.
Your paper discusses tax competition between countries and between U.S. states—the race to have the lowest effective corporate tax rates, in order to entice businesses to locate their operations, or at least their profits, there. On an international level, what incentives or enforcement could entice low-taxing jurisdictions to raise their tax levels? Might the race not just go underground, in a scenario where countries have similar tax rates, but very different collection and enforcement mechanisms?
Some people, such as Vito Tanzi, formerly an economist at the UN, argue that we need an international tax authority to implement a set of regulations, including floors on tax rates, to make this happen. We might not need to go that far. Tax treaties and regulations being developed by the OECD (Organization for Economic Cooperation and Development) and the UN, which bring about cooperation on tax enforcement, are an important first step. In addition, the United States, in its bi-lateral and regional trade agreements, needs to put in provisos that outlaw such tax competition and include enforcement mechanisms. Perhaps there needs to be similar provisions in other international agreements, such as in the WTO.
Most directly and immediately relevant to U.S. policy is that, as we point out in the paper, the U.S. has taken a lead role in international tax competition, driving down rates and enforcement at home and elsewhere. At a minimum, the U.S. should stop doing this and even reverse some of the steps it has taken in recent years.
Political Economy Research Institute
