In the article, “Is outsourcing free trade?” the deduction was made that outsourcing is a part of free trade. In this article we thus examine how a war on outsourcing by Congress would hurt US exports and how the benefits of free trade outweigh the negatives.
Outsourcing received much notoriety during the 2004 and 2008 Presidential elections. With outsourcing lambasting by and large a political safe heaven, this is not however surprising. But now elected to office, is it in the US interest for President Obama to implement credible protectionist policies against outsourcing? In the unlikely scenario that Obama genuinely attempted to curb outsourcing, (as opposed to simply appearing tough with “tax reform”) what, hypothetically speaking, could be the economic repercussions?
Free trade and globalization is about reciprocity, “a two way street”. The principle is that each country specializes in those fields where its advantages are greatest or disadvantages are least. Both countries will thus then be better off than if it remained self-sufficient.
Protectionism is often described as “isolation”. This is because protectionism affects “both sides of the street”. Of course, protectionist policies are implemented with the intention of only impacting imports. But if the US implements protectionist policies, other countries could react and implement their own protectionist measures. US exports are thus inadvertently affected as they must compete against foreign taxes, tariffs and subsides.
It was only in 1991 that India dismantled it’s policies of economic isolation. Liberalization to foreign investment resulted in an influx of US MNCs to India. The Indian market offered new opportunity, investment and growth to the US. A potent example of this is of US produced consumer goods and services. Practically all US MNCs are now present in India and selling to India’s 350 million, (and soon to be 500 million) strong middle class.
A move against outsourcing by the US, could see India revert to protectionist measures against the US. The reality of such a prospect was elaborately exemplified by Vishwa Hindu Parishad’s, (a close aide of India’s BJP political party) reaction to Barack Obama’s anti-outsourcing polices. The VHP stated that should America continue with its anti-outsourcing policies then India will, “have to take steps to hurt American companies in India.” This sentiment was also expressed by Indian IT minister Arun Shourie, when he stated, “The West cannot expect us to keep opening our markets for goods and then put protectionist measures on goods and services where other countries have strength.”
Free trade and globalization enables US companies to dominate foreign markets and this significantly benefits the US economy in a variety of ways e.g. tax revenues, job creation, redevelopment in current industries and investment in new industries. America exports more than it imports to India; free trade with India, ultimately benefits the US economy more than it hurts it. How many American’s drive a Indian TATA car or own a Indian HCL computer?
Though unintentional, the implementation of US protectionist policies against outsourcing, can have the affect of closing foreign markets to the US. The non implementation of protectionists policies is essential, otherwise US companies cannot export and sell to India’s 350 million strong middle class. Any conceivable benefits of protectionism are considerably undermined by the benefits attained from free trade and globalization. If we declare a war on outsourcing we seek to lose and suffer the most.
Outsourcing is simply a part of the “free trade” and “globalization” package. If America simply exports and does not import, then we arrive to a point where this is no longer free trade but unilateral exportation. Such one-sided dominance is not something India would not adhere too.
America is renowned for it’s strong business intuitions. At best US companies dominate a given industry; at worst US companies have a strong presence. Hence, it should be realized immediately that America has the most to gain and lose from globalization, (or the lack of it). In a 2006 survey of American economists 87.5% agreed that the US should eliminate remaining tariffs and other barriers to trade. We should not fear, prohibit or detest outsourcing but acknowledge that it is a part of the “free trade” and “globalization” deal. A deal in which the US also gains and recuperates in the form of access to foreign markets. As a side note, the US economy does not only benefit from open foreign markets but also benefits from the increased competitiveness US companies attain by outsourcing.