AP News

WHY IT MATTERS: Outsourcing


The issue:

U.S. multinational companies have taken advantage of lower trade barriers over the past 15 years to shift jobs and production to lower-wage countries, a practice generally known as outsourcing. That's cut costs for consumers and helped those companies grow, which can support employment in the United States. Still, it has also raised fears that the United States is permanently losing the kind of high-paying, manufacturing jobs needed to support a healthy middle class.

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Where they stand:

President Barack Obama has proposed giving tax breaks to U.S. manufacturers that produce domestically or bring back jobs from overseas. He also wants U.S. companies to pay taxes on more of their overseas earnings. Currently, U.S. corporations don't pay U.S. taxes on overseas profits unless they bring that cash back to the United States. Obama argues that this encourages outsourcing. Many Republicans say his proposal would raise taxes on U.S. companies and encourage them to move their headquarters overseas so they would no longer be considered U.S. corporations.

Mitt Romney says he wants to make the United States a more attractive place to do business by cutting corporate taxes and reducing regulations. Romney also says he'll discourage companies from moving operations to China by pushing that country to let its currency rise in value. That would make its exports more expensive.

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Why it matters:

With unemployment painfully high, it's not surprising that fears over outsourcing, which first surfaced in the mid-2000s, have returned. Unemployment topped 8 percent for 43 months from February 2009 through August 2012, the longest stretch since the Great Depression. It dipped to 7.8 percent in September.

Also fueling fears is the decision by Apple and other high-tech companies to manufacture many of their goods in China. That suggests it isn't just low-skilled jobs in industries such as textiles that are being lost.

According to Walter Isaacson's biography of Steve Jobs, the late Apple founder told Obama in 2010 that there weren't enough engineers in the U.S. to support its vast manufacturing operations. Jobs also argued that government regulation made it harder to set up factories in the U.S.

One new twist is that U.S. manufacturers are more competitive after the recession and fewer jobs are being shifted overseas. Wages in China are rising and its currency has increased in value. U.S. factory workers have accepted pay cuts and are more productive. Energy also has become cheaper for U.S.-based companies thanks to gains in oil and natural gas production.

All those factors have eroded China's cost advantages and perhaps slowed the outsourcing trend. Michael Dolega of TD Economics estimates that the U.S. has gained about 55,000 manufacturing jobs in the past year that in the past would have been shipped overseas.

Even so, economists warn that the two candidates are overstating the potential for a manufacturing renaissance. Jeffrey Bergstrand, a professor at the University of Notre Dame, calls it "factory nostalgia."

The United States lost roughly 6 million manufacturing jobs from 2000 to 2010. Since then, it has regained about a half-million of those jobs, or less than 10 percent of the losses. Dolega estimates that under a best-case scenario, the U.S. could add another 1 million manufacturing jobs over the next decade.

"There are some jobs that are not going to come back," Obama acknowledges. "I want high-wage, high-skill jobs. That's why we have to emphasize manufacturing." Says Romney: "We can compete with anyone in the world as long as the playing field is level."


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