Myth-busting Offshoring

Over the electronic transom comes an angry editorial from Fred Bergsten, a well-known trade guru at the Peterson Institute for International Economics in Washington, decrying the U.S. Congress’ recent refusal to extend the president’s fast track authority, thus effectively ending a three-decade tradition in which Congress votes thumbs up or down on his trade deals but, with the exception of the odd clause here or there, doesn’t re-negotiate them. Bergsten calls the action the “gravest threat to the global trading system in decades” and he particularly condemns the “time out on trade deals” proposed by one of the surviving presidential candidates. (He doesn’t mention the candidate’s name, but it’s Clinton.)

U.S. elections are always bad for trade deals, but the U.S. seems especially xenophobic this year, even as the declining U.S. dollar is shrinking the trade deficit every passing quarter. Maybe the problem is the political importance of the white “working folk” who have been so key to Mrs. Clinton’s campaign in the last couple of months and whom Senator Barack Obama will have to woo in the fall if he’s the nominee. They may not be embittered by things such as outsourcing and offshoring but they evidently do resent it a lot when companies take their business elsewhere. Obama promises to remove provisions in the tax code that supposedly help them do so.

Jingoism is, strangely enough, a universal phenomenon even if Canadian jingoists never see the beam (often made of softwood) in their own eye. The current troubles of the Big Three auto companies have spawned various schemes to protect and promote local product, most of them injurious to customers. So Statistics Canada has got its timing exactly right in bringing out a new study on the extent of outsourcing and offshoring in Canada. (You can outsource without offshoring if you buy inputs produced by other Canadian companies. You can offshore without outsourcing if you source from one of your divisions in another country.)

StatCan doesn’t take sides in debates on subjects as controversial as offshoring — not explicitly at least — but the data the new study provides suggests pretty clearly there’s not really much to debate.

Outsourcing has been on the rise for almost 50 years. Even so, it hasn’t risen very much. Purchased inputs are up only from 48.5% of total output in the business sector in 1961 to 52.0% in 2003 — less than a percentage point a decade. Within that total, however, the purchase of service inputs doubled, reflecting an economy wide increase in the importance of services. But despite doubling purchased service, inputs are still only two-thirds of material inputs, i.e., inputs you can kick that don’t kick back.

That’s outsourcing. As for offshoring, inputs purchased in other countries went from about a sixth of total purchased inputs to about a quarter — again not a spectacular increase over four decades and one that in fact stalled and began to reverse itself in the late 1990s. Despite all the foofaraw about imported services — call centres and backroom operations in Bangalore and so on — in the business sector they were just 7.6% of purchased service inputs in 2003, which means something just over three per cent of total inputs.

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