NCPA - National Center for Policy Analysis

Sending Services Overseas Good for America

February 2, 2004

Those economists who predict that the United States will be a Third World country in 20 years because of white-collar job losses due to the outsourcing of service sector employment to India and China are wrong, says Douglas Irwin.

While naysayers of outsourcing have focused on the issue of displaced workers, they have completely ignored the efficiency benefits of service sector outsourcing, says Irwin:

  • First, consumers will be provided with the services they demand at lower prices; if a capable radiologist in India can read x-ray pictures at a quarter of the cost of doing so domestically, important health-care services can be delivered at lower cost to everyone, putting a brake on exploding medical costs.
  • Second, U.S. exporters of goods and services will benefit from the extra income generated abroad; because service providers in low-wage countries require U.S. computers, telecommunications equipment, other hardware and software and they also procure legal, financial, and marketing services from the United States.

The United States is a major exporter of services, accounting for nearly a fifth of the world's trade in services which amount to nearly 30 percent of the value of all U.S. exports. In 2003, the United States had about a $550 billion deficit in goods trade, while trade in services accounted for a $60 billion surplus.

Unfortunately, several state governments are considering laws that limit contracting with businesses that outsource from developing countries. Penalizing firms that import foreign-produced services is not attractive, because it will only handicap domestic firms in an area that their foreign rivals can engage in freely, says Irwin.

Rather than penalizing firms, public policy makers should include such things as ensuring the portability of health and pension benefits in order to reduce the adverse impact of changing jobs, which must inevitably happen in an ever-changing economy, says Irwin.

Source: Douglas Irwin, "Outsourcing is good for America," Wall Street Journal, January 28, 2004.


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