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The Outsourcing Debate In US Elections – Analysis

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By Uma Purushothaman

In the US presidential election, dominated by domestic issues and with little focus on foreign policy, outsourcing has emerged as a point of discussion. India is one of the top countries to which the US outsource work. About 60 percent of the revenues of Indian IT software and services companies is from the US. Also, this is an industry which has provided employment opportunities to large numbers of Indians. So India would be closely watching how this debate plays out.

In the US, recent unemployment figures show that the unemployment rate rose has risen for the second time in almost a year, from 8.1 percent to 8.3 percent and would have been around 11% if labour participation was not at record lows. The unemployment rate has remained above 8% for almost 42 months in a row now. Outsourcing, therefore, is a major concern for American voters. The issue made the headlines recently when it was revealed that the uniforms that the American team wore for the opening ceremony of the Olympics were made in China. This led to lawmakers on both sides of the polity making statements showing their outrage. Harry Reid, the Senate Majority leader, made his unhappiness clear saying that the garments should be “burned” and US Olympic committee should be “ashamed” and “embarrassed,” that the uniforms were made in China at a time when people in the American textile industry are looking for jobs. His sentiments have been echoed on the Republican side as well. Though at first glance, one would feel that the outrage is about patriotism, clearly the larger issue of outsourcing is also at play here.

Obama Versus Romney
Obama Versus Romney

Both President Obama and Mitt Romney have tried to portray the other as being responsible for the large exodus of jobs from the US to foreign shores like India, China and Mexico. President Obama plans to remove tax deductions for shipping jobs overseas, provide new incentives to bring jobs back to the US, provide temporary tax credits to direct $20 billion into domestic clean energy manufacturing, and close a loophole that allows companies to shift profits overseas to discourage outsourcing. He has also criticised Romney over his past in private equity, suggesting that he was a “corporate raider” who was a “pioneer in the business of outsourcing jobs” to countries like China and India.

The Democrats have in particular focussed on Romney’s time at Bain Capital, a company which has reportedly outsourced jobs. Though it is clear that Bain outsourced jobs at a time when Romney was no longer in charge of its day-to-day activities, the Democrats maintain that the company was still owned by him in the 1990s. In response, the Republicans have been arguing that “‘outsourcing’ does not technically have to mean sending jobs to foreign countries (that is ‘offshoring’), rather than simply having an external company perform a function that could have been performed in-house.” Whether this argument cuts ice with voters is anyone’s guess. The Republicans have argued that companies which received billions of dollars in funding from Obama’s America Recovery Plan (or the stimulus) have laid off American workers and outsourced jobs and in fact operate outside the US. Though the companies under attack have denied these allegations, it has not stopped the Republicans from continuing their attacks. Mitt Romney has even called the President the “outsourcer in chief”.

Romney has promised to crack down on China for artificially devaluing its currency, thus making cheaper goods and making it more difficult for American manufacturers to compete with them. But at the same time, he has also pledged to exempt companies’ overseas profits from taxes, something which according to the Democrats will only incentivise outsourcing.

The two sides’ rhetoric on outsourcing is likely to continue throughout the campaign and the pitch might even turn up as Election Day approaches. However, at the end of the day, globalisation is an irreversible process and companies anywhere in the world would outsource manufacturing to places which can make cheaper products. It is only because these companies produce cheap goods that Americans can buy cheap products at home.

Moreover, both candidates know these facts and that stopping outsourcing will have an adverse effect on the US economy. In fact, though President Obama during his campaign in 2008 had promised to renegotiate the NAFTA. His argument then was that NAFTA makes it easier and cheaper for companies to manufacture goods in Latin American countries and then sell it in the US.

As President, Obama has not only failed to fulfil his promise, but has gone further and negotiated more free trade treaties with South Korea and Colombia, which could have the same effects as NAFTA. Similarly, Romney as a successful businessman knows why companies take up outsourcing and is unlikely to stop it as President. Most of the rhetoric around outsourcing is essentially about the two candidates playing to the galleries for votes and is unlikely to result in any major change in policy after the election. But till Election Day, the rhetoric will not only continue, but also gain momentum.

(The writer is an Associate Fellow at Observer Research Foundation, Delhi)

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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