LegiStorm

Summary:

Foreign outsourcing—the importing of some intermediate product (i.e., a portion of a final product or some good or service needed to produce a final product) that was once produced domestically—is not a new phenomenon, nor is it one that is economically distinct from other types of imports in terms of its basic economic consequences. A steadily rising level of trade in intermediate products is one of the salient characteristics of U.S. trade and world trade for the last 30 years. It has been estimated that as much as a third of the growth of world trade since 1970 has been the result of such outsourcing worldwide. While foreign outsourcing may seem different from traditional notions of trade in that it involves exchange of a productive resource (capital or labor) rather than an exchange of a final good and service, the ultimate economic outcome is exactly the same: a net increase in economic efficiency through the elimination of economic inefficiencies that occur when countries use only the productive resources found within their borders. This gain is not likely to be achieved, however, without causing costly disruptions for the particular workers and sectors tied to the now-imported good. Foreign outsourcing, trade in general, and trade deficits tend to change the composition of total output and the composition of total employment, but it is unlikely that economy-wide they lead to any change in the overall level of either. In some areas of the economy output falls and jobs are destroyed, but in other areas output is increased and jobs are created. There are two complementary reasons for this. First, the Federal Reserve using monetary policy can set the overall level of spending in the economy to a level consistent with full employment. With aggregate spending at the right level, full employment is possible with or without outsourcing, trade deficits, or trade in general. Second, according to basic economic principles any increase in the demand for an import will also lead to adjustments in the foreign exchange market that will induce an equal increase in the demand for the country's exports of goods or assets. The positive stimulus to employment of the increased export of goods is direct, that of the increased export of assets is indirect, but both tend to create jobs in other parts of the economy. Indirect evidence of this inherent "two-way" nature of trade and that increased outsourcing over the last 30 years has not likely led to a significant net diversion of employment or output abroad is found in the relatively stable patterns of employment and output between the domestic parent and foreign affiliates of U.S. multinational corporations. In addition, there is evidence of sizable foreign outsourcing to and job creation in the United States. The destructive aspects of foreign outsourcing are costly and distressing to those whose jobs are lost to increased imports. Therefore, matters of efficiency and equity are intertwined and one of the principal challenges for policymakers in the face of foreign outsourcing (and trade in general) is to find ways to ameliorate the associated harm, without sacrificing the economy-wide gains that such trade generates. Compensation for loss and adjustment assistance is thought by economists to offer the best chance for securing higher economic efficiency along with distributional equity. This report will be updated as events warrant.