Protectionist policies against outsourcing would hurt the US economy

In open markets, greater competition spurs the reallocation of labor and capital to more profitable sectors of the economy. The benefits of such free trade, globalization and outsourcing to both consumers and producers are significant. Recently elected President Barack Obama thus far has only proposed tax reform to counter outsourcing. However, real effective protectionist policies against outsourcing would be considerably detrimental to US companies seeking to be the most competitive in an increasingly global world.

Resorting to protectionism is a recipe for decline. An open economy leads to concentrated costs (and diffuse benefits) in the short term and significant benefits in the long term. Protectionism generates pain in both the short term and the long term.

Fact, protectionism is isolationism, has a history of failure, causes job losses and damages the economy. Proposals to punish outsourcing businesses, institute tariffs, or change tax rules will carry unintended consequences if enacted.

Such measures would injure U.S. firms that export goods and services and erode U.S. competitiveness, often in unexpected ways. In a 2006 survey of American economists, 90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries.

There are clear examples of jobs being sent across U.S. borders because of U.S. trade policy -- but not for the reasons that critics of outsourcing believe. Consider the example of candy-cane manufacturers: despite the fact that 90 percent of the world's candy canes are consumed in the United States, manufacturers have sent much of their production south of the border in the past five years. The attraction of moving abroad, however, has little to do with low wages and much to do with protectionism. U.S. quotas on sugar imports have, in recent years, caused the domestic price of sugar to become 350% higher than world market prices. Thus candy makers have relocated production to countries where sugar is cheaper, between 7,500 and 10,000 workers in the Midwest have lost their jobs, victims not of outsourcing but of the kind of protectionism called for by outsourcing's critics.

A similar story can be told of the steel tariffs that the Bush administration foolishly imposed from March 2002 until December 2003 (when a ruling by the World Trade Organization prompted their cancellation). The tariffs were allegedly meant to protect steelworkers. But in the United States, steel users employ roughly 40 times more people than do steel producers. Thus, according to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made U.S. steel-using industries less competitive and raised prices for consumers.

These examples illustrate the problem with relying on anecdotes when debating the effects of outsourcing. Anecdotes are incomplete narratives that fail to capture opportunity costs. In the cases of steel and sugar, the opportunity cost of using protectionism to save the outsourcing of jobs was that much larger numbers of jobs were lost in sectors rendered less productive by higher input prices. Trade protectionism amounts to an inefficient subsidy for uncompetitive sectors of the economy, which leads to higher prices for consumers and a lower rate of return for investors. It preserves jobs in less competitive sectors while destroying current and future jobs in sectors that have a comparative advantage. Thus, if barriers are erected to prevent outsourcing, the overall effect will not be to create jobs but to destroy them. By prohibiting outsourcing, US firms would be left less competitive and reeling from competition in global markets.