Sending Jobs Overseas: The Cost to America's Economy and Working Families - Report by Working America and the AFL-CIO
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Sending Jobs Overseas: The Cost to America’s Economy and Working Families Report by Working America and the AFL-CIO
Working America 815 16th St., N.W. Washington, D.C. 20006 202-637-5137 Fax: 202-508-6900 info@workingamerica.org AFL-CIO 815 16th St., N.W. Washington, D.C. 20006 202-637-5000 Report compiled by Daniel Marschall, AFL-CIO, and Laura Clawson, Working America. Cover photo by Michael Barber.
EXECUTIVE SUMMARY
“The most important thing we can do is to bring both the money and the jobs back
from overseas.” —Kyle, Sandy, Ore.
“We need taxation on companies that export jobs and incentives for those that keep
them here.” —Sarah, Milford, Ohio
O utsourcing of jobs to foreign countries is
one of the great hidden economic issues of
recent years. It is big business, with multinational
due to outsourcing, the report by taking a broad
view of the national-level numbers that are avail-
able and offering case studies of key industries.
corporations actively shifting jobs out of the The problem of outsourcing is a global one.
United States and around the globe in search of American policy solutions should not protect
the cheapest possible labor. But, following popular America’s workers at the expense of others.
outcry against the practice in 2004, corporations Instead, policy responses to outsourcing should
have done their best to hide the details even as create good jobs for all who want them, as well as
they expand their offshoring activities. As a result, job rights for workers around the globe, so that cor-
outsourcing has by and large fallen out of the porations cannot drag down labor standards for all
headlines. workers by exploiting a few.
But it has not escaped the public’s attention—
when field organizers asked Working America The Problem
members for their ideas about how to solve the The annual almanac of the outsourcing and off-
jobs crisis, putting an end to outsourcing and shoring industry, Plunkett’s Outsourcing & Off-
bringing jobs back to the U.S. was the most fre- shoring Industry Almanac 2010, estimates that
quently cited specific solution. Working people this was a $500 billion global industry in 2009 that
see jobs leaving their own communities and have involved more than 350 prominent organizations
no doubt that outsourcing is destroying lives and operating in 61 distinct industry groups.1 Study
local economies; it’s putting together the big pic- after study—many of them by consulting firms
ture that’s difficult. that specialize in outsourcing—finds that up to
This report was created by Working America half of corporations have already sent or are plan-
and the AFL-CIO as a companion piece to Work- ning to send jobs overseas. Hundreds of thousands
ing America’s Job Tracker, a ZIP code–searchable of American jobs are lost each year as a result, and
database of jobs exported (as well as Occupational working conditions and pay for workers around
Safety and Health Act violations and other work- the world are driven down by corporations’ relent-
place issues). Users can search their area for com- less drive for cheaper labor.
panies that have sent jobs overseas. Though Job
Tracker is one of the largest publicly available, fully • Outsourcing has accelerated since 2004,
searchable records of the extent and specifics of affecting a wider swath of industries and
outsourcing, it only reveals the tip of the iceberg. occupations. Duke University and the Confer-
This report and Job Tracker contextualize each ence Board surveyed 1,600 service companies
other—Job Tracker by mapping specific job losses in 2008 about their future investments and
3discovered that 53 percent had formulated a ation of more jobs in the United States, calling for
corporationwide offshoring strategy—more greater investments in infrastructure and rapid
than twice the number that had done so in action to move toward a clean energy economy.
2005. Moreover, 60 percent of the firms that State chief elected officials, such as Ohio Gover-
engaged in outsourcing in 2008 intended to nor Ted Strickland and state representatives, have
expand those activities over the next three become involved as well, implementing policies and
years. Few expected to shift jobs back to the passing laws to limit the flow of public funds to for-
U.S. Ominously, all of the industries tracked eign firms. Finally, some corporate executives and
in the study between 2005 and 2008 had entrepreneurs have begun to question the wisdom
increased their use of offshoring, with the of wholesale offshoring, deciding to construct new
practice growing most rapidly in the sectors facilities in the United States, expand their opera-
that had not previously engaged in the prac- tions here or establish new firms that use the skills,
tice in a significant way. knowledge and capabilities of the American work-
force. The nation needs immediate action by the
• The continued outsourcing of American jobs federal government and private-sector employers
to foreign countries is part of a pattern of cor- to spur economic growth and job creation, as well
porate policies toward international trade that as to establish policies and programs that are part
have eroded the country’s manufacturing indus- of a long-term economic strategy to rebuild the
trial base to the point that industry specialists, middle class and rebalance the American economy.
military leaders and policymakers question Two specific measures already before Congress
whether national security is at risk. The exis- would check some of the worst offenses:
tence of large, chronic U.S. trade deficits across
the board—even in many of the most capital- • Manipulation by the Chinese government
and knowledge-intensive sectors—indicates keeps Chinese currency undervalued by 40
that, whatever the fortunes of its multinational percent with respect to the U.S. dollar, cost-
companies and their global production net- ing the U.S. economy as many as 3 million
works, the United States is losing competitive- jobs.3 The Chinese government has violated its
ness as a site for manufacturing.2 international obligations with respect to work-
ers’ rights, human rights, currency manipula-
• Even as other nations implement strategic tion, illegal subsidies and intellectual property
industrial policies to strengthen their techno- rights, among other things. The AFL-CIO has
logical capacities and build a strong, modern urged Congress to introduce and pass a com-
manufacturing base, U.S. policies have encour- prehensive trade bill giving our government
aged U.S. manufacturers to move offshore more the tools it needs to address the Chinese gov-
and more of their operations. Only a compre- ernment’s currency manipulation and illegal
hensive strategy aimed at reversing the erosion subsidies, strengthening our trade laws and
in the nation’s overall manufacturing base will their enforcement.
be sufficient for preserving and revitalizing the
nation’s industrial base in the coming decades. • Under current tax rules, U.S. multinational
corporations are permitted to postpone their
payment of U.S. taxes on most of their foreign
The Remedies earnings until those earnings are repatriated
to the United States. These provisions encour-
The U.S. Congress has, at times, taken action to age corporations to continue investing in their
limit offshoring by adjusting the nation’s inter- overseas operations—especially in developing
national trade policies, though more needs to be countries with low tax rates—rather than cre-
done. President Obama has championed the cre- ating jobs in the U.S. The Creating American
4Jobs and Ending Offshoring Act (S. 3816) would Outsourcing is enormously destructive to
close two tax loopholes and encourage compa- American jobs; despite the clear concern work-
nies to move their overseas jobs back to the U.S. ing people exhibit about the issue, it receives too
The bill would end the practice of tax deferral of little attention in the media and from policymak-
overseas earnings and eliminate the deductions ers (despite some recent advances). Corporations
that companies now receive when they close know that outsourcing is unpopular and that their
down American plants and move production ends are best served by keeping the practice hid-
to foreign locations. It would also provide busi- den in the dark. The Job Tracker and this report
nesses with a two-year break from paying their are intended to shine a light, exposing the extent
share of Social Security payroll taxes on wages of outsourcing, the harm it causes and the need for
of employees, as long as those wages were paid greater transparency.
to workers performing services that were previ-
ously done in foreign locations.
5INTRODUCTION
“I didn’t think the day would ever come,” a
Harrisburg, Pa., newspaper headlined in June
2010. The story carried the disheartening news
Bomberger told a British publication. “They want
to outsource, build plants in Mexico, shut down
American factories and move stuff around.”5
that Hershey Foods Corporation was abandoning Hershey is not alone: The offshoring or out-
its hometown. The small-town manufacturer of sourcing of American jobs (see box 1 for a defini-
Hershey Kisses, Reese’s Peanut Butter Cups, York tion) has become a common feature of the global
Peppermint Patties and other iconic items in the economy, led by American-based corporations that
pantheon of America’s sugary sweets would close have placed gaining market share and making money
down its historic East plant at 19 Chocolate Avenue in front of their concerns for the jobs and livelihoods
in Hershey and eliminate as many as 600 jobs. After of working families. As far back as the 1980s, the
repeatedly chopping away at its U.S. workforce for motivation of corporate executives was clear. As one
years, the finality of moving production to Mexico manufacturing manager told Metalworking News
was becoming apparent and unbearable. “I think in 1989: “If you buy on the outside cheaper than you
it’s horrible. I didn’t think the day would ever come can make it yourself, why not? It comes down to
that they would close down this plant. This build- money: You’ll go where the price is right.”6
ing has its own aura…. There was pride working Leaders of many of America’s largest and most
here,” said one worker.4 “I really don’t know what profitable corporations have vastly increased their
the rationale is other than cheap labour,” Choco- use of outsourcing at the same time as millions of
late Workers Local 464 Business Manager Dennis manufacturing and service jobs have disappeared,
Box 1
How do we define offshoring or outsourcing?
For the purposes of this report, the business practice of outsourcing American jobs to
foreign countries—also known as offshoring or offshore outsourcing—is the process by
which a company or government agency moves jobs from its home country to a foreign
location, or chooses to increase the production of goods or services by using a foreign
third-party company rather than provide employment to U.S. workers who are capable of
producing such goods or services. Simply put, offshoring entails substituting foreign for
domestic labor. Outsourcing can also refer to jobs transferred to third-party contractors
within the United States; because it is in wide use referring to offshore outsourcing, we
use it interchangeably with offshoring.
A great deal of offshoring or outsourcing is conducted by multinational corporations
that are headquartered in the U.S. or other highly industrialized countries but have
numerous facilities in other nations (IBM, for example, has plants in 167 countries and
employs 320,000 persons worldwide). Such multinational corporations may choose to
offshore their work by contracting with a firm that is owned by foreign nationals in the
targeted country, or sending the work to one of its own operations located there (in
which case, the practice is known as captive offshoring.) Outsourcing or offshoring was
a $500 billion global business in 2009.
6the wages and salaries of American employees have quality production, limit transportation costs, and
stagnated, and wealth has become more concen- foster greater innovation and intra-company
trated than any time since the 1920s. While 26.1 communication.
million Americans were unemployed, underem-
ployed, marginally attached to the labor market or
involuntarily working at part-time jobs as of Labor The Hershey Corp. and
Day 2010, according to the Economic Policy Insti- Hershey, Pa.:
tute, corporate profits increased (at an annualized A Sweet Story Turns Sour
rate) to $1.64 trillion dollars during the second
quarter of this year.7 In 2002, the Hershey Corp. controlled 35 percent
The failure to invest in domestic job creation of the entire confectionary market and employed
and the outsourcing of American jobs to foreign 6,200 of the 12,000 residents of the town of Her-
countries with low wages and lax workplace pro- shey. That year, the company’s trustees shocked
tections has undoubtedly contributed to soaring the town by proposing a diversification plan that
corporate profits. But, as Hershey’s move to Mexico included selling the food maker to an outside buyer.
makes clear, these profits come at a cost. That cost The proposal sparked a united front of opposition
is not only incurred by workers in the U.S. who by small business owners, the union, school alumni
have lost or are at risk of losing their jobs but by and former Hershey executives, all of whom balked
workers around the globe exploited by corporations at the threat to their traditional way of life. “If we
in search of lower labor costs and less stringent lose Hershey Foods, we’re going to lose value,
safety and health conditions. integrity and just about everything in the commu-
This Working America and AFL-CIO report nity,” argued a local real estate agent.8 Though the
illuminates the dimensions of offshoring and proposed sale was eventually abandoned, the town
how the phenomenon has affected the jobs of was put on notice that times had changed. Old-time
American workers, the strength of our country’s Hershey was adopting global ambitions.
manufacturing base, and public policy debates at The herald of those ambitions was Richard
federal and state government levels. It is intended H. Lenny, a new Hershey Foods Corp. CEO hired
to provide background information for those using in 2001 to cut costs, expand market share and
the increase profits. In his first 18 months on the job,
Working America Job Tracker database, avail- Lenny shut down three production facilities, closed
able online at http://www.workingamerica.org/ a warehouse, laid off 700 workers and provoked
jobtracker/ in October 2010. The report begins a strike over health care premiums—all while the
by examining the extent of offshoring, a difficult company’s net income rose 14 percent, the stock
task because of the lack of systematic government price soared and Lenny’s annual salary reached
data. It then reviews how this practice has con- $4.7 million (without his stock options, which could
tributed to the erosion of the country’s manufac- be worth another $10 million).9
turing base, which economists and policymakers Hershey plants across the U.S. and Canada
have found to be a threat to our national security. were shuttered during Lenny’s tenure, culminating
Next, it provides information about the research in a February 2007 announcement that the com-
process involved in creating the Job Tracker and pany would save up to $190 million a year by shift-
highlights some key findings. The final section ing production to Mexico, where labor costs were
reviews how America’s political leaders have tack- 90 percent cheaper and sugar prices were low.10
led the issue through legislation, executive orders Thousands of workers across the country lost their
and government spending to create jobs in Amer- jobs in this vast restructuring.
ica’s clean energy economy. In addition, some cor- Hershey’s chosen spot for a new production
porations are beginning to engage in backshoring, facility was Mexico’s third most populous city,
returning jobs to the United States to maintain Monterrey, center of the country’s steel industry
7and an economic powerhouse with transnational 14 roadblocks on the eastern side of the city. When
corporations in cement manufacturing, petrochem- police officers tried to remove the trucks blocking
icals, telecommunications, glass, financial services traffic, a grenade was lobbed at their police car.15
and brewing, among others. Hershey purchased Commerce in three other cities was affected by
a 200,000-square-foot building there in 2007 and the location of the barriers, which are designed to
planned to establish a production operation that disrupt police travel throughout the city and dem-
would employ as many as 500 workers.11 According onstrate the cartel’s power. “U.S. companies see
to an analysis by the Boyd Co., a consultant firm Monterrey as high risk now,” declared the director
that specializes in the candy industry, a Mexican of Altegrity Risk International.16 In late August,
production facility in Monterrey would have access because of the “high incidence of kidnapping in
to workers for about $2.77 per hour.12 the Monterrey area,” the U.S. State Department
instructed embassy personnel to send their chil-
dren back to the U.S. for their safety and security.17
Stopped at the Border When Hershey Food Corp. trucks are able to
leave the city, they have to pass through border
Shipping food products back to the U.S. from stations, where a sample of food products—about
Monterrey and other parts of northern Mexico, 1.5 percent of all imports—is inspected by U.S.
however, has not proven to be a smooth journey. Food and Drug Administration (FDA) personnel.
First the company has to move the products out In January 2007, a shipment of Hershey’s Kisses
of the city by truck. That process is frequently was blocked due to salmonella contamination. A
interrupted by cargo theft, including the kidnap- few months later, five more shipments of Hershey
ping of drivers and the outright theft of truck trail- candies were halted, again because of salmonella,
ers, which is causing the food industry to “suffer a leading cause of death from food-borne illnesses.
tremendous losses,” according to a FreightWatch The Coalition for a Prosperous America (CPA)
report.13 Violence escalated during the summer of found that nearly 9,000 cases of candy treats
2010, leading many corporations to pause or sus- were stopped at the border by the FDA.18 As Fred
pend their operations. “Supply chain operations Stokes, president of the CPA, summarized the
throughout Mexico continue to face significant problem: “In the rush to close American plants
challenges from both cargo theft and other security and eliminate American jobs in favor of offshoring,
risks.... most notably the increasingly violent war many large food companies are playing fast and
between drug cartels and Mexican officials along loose with our lives.”19
the U.S.-Mexico border, [which] has caused sig- No information is available about what happened
nificant supply chain disruption this year,” warned to the salmonella-riddled Hershey chocolates after
one e-mail alert.14 Hostilities culminated in August they were blocked at the U.S. border. But the lesson
2010 when drug cartels blocked all inbound and is clear—outsourcing does not only endanger the
outbound traffic around Monterrey by setting up workers and communities that lose jobs.
8Section one
Outsourcing to Foreign and multinational corporations intensified their
Countries: A Continuing concerted expansion into international markets,
Threat to U.S. Jobs the process commonly known as globalization. The
prospect of American jobs being lost to outsourc-
I t’s not just Hershey: Outsourcing is big business. ing particularly resonated with working families
The annual almanac of the outsourcing and off- in 2004, when the effects of international trade
shoring industry, Plunkett’s Outsourcing & Offshor- became a hot-button issue during the presidential
ing Industry Almanac 2010, estimates that this was contest. That year, President George W. Bush’s chief
a $500 billion global industry in 2009 that involved economic advisor raised a furor when he declared
more than 350 prominent organizations operating that offshoring was “just a new way of doing inter-
in 61 distinct industry groups.20 Study after study— national trade,” a sentiment that the president
many of them by consulting firms that specialize in echoed when he asserted, “When a good or service
outsourcing—finds that up to half of corporations is produced more cheaply abroad, it makes more
have already sent or are planning to send jobs over- sense to import it than make or provide it domesti-
seas. Hundreds of thousands of American jobs are cally.”21 Democratic presidential candidate John
lost each year as a result, and working conditions and Kerry responded by condemning the “Benedict
pay for workers around the world are driven down by Arnold CEOs” that relocated jobs across national
corporations’ relentless drive for cheaper labor. borders, and his U.S. Senate colleagues voted to
Outsourcing American jobs to foreign countries stop federal contractors from shifting jobs overseas
involves a diverse range of products, including manu- using U.S. tax dollars. Some 30 bills to restrict out-
factured goods (such as automobile parts, garments sourcing were introduced into state legislatures.22
and electronic components), low-wage and routinized Dislocated information technology workers—many
service jobs (notably, the operation of call centers of whom had trained their replacements as employ-
in countries such as India and the Philippines), and ers shifted their jobs to India—started a grassroots
high-skill professional services (such as computer national movement to expose the trend.23 More than
programming, engineering and architectural tasks). 550 articles on offshoring jobs appeared in English-
The process of offshore outsourcing may be medi- language publications that year. “This outsourcing
ated—and often concealed—when a company or stuff is huge, and it’s upsetting everybody,” Republi-
agency first outsources services to a domestic firm, can operative Frank Luntz declared.24
which then offshores the labor to workers in a foreign Labor and corporate leaders faced off against
country. But whatever machinations are used to man- one another throughout the year. Speaking at a
age this process, the global market for such services California event, the CEO of the U.S. Chamber of
is enormous. Commerce praised the benefits of job offshoring and
advised American workers to “let’s not whine” about
the practice.25 Carly Fiorina, then CEO of Hewlett-
Making Headlines, Packard, chimed in: “There is no job that is Ameri-
Causing Controversy ca’s God-given right anymore.”26 Decrying the loss of
middle-class jobs in services and professional occu-
Public and mass media attention to the offshoring pations, the AFL-CIO Executive Council pointed
phenomenon has ebbed and flowed since the late out that the “corporate drive to take advantage of
1970s, when U.S. manufacturing employment peaked workers with few rights and limited opportunities
9not only harms American workers, it drags workers the Plunkett industry almanac.32 Corporate policy
everywhere into a race to the bottom.”27 has shifted to obscure the dimensions of offshoring
The continued loss of manufacturing jobs was whenever possible. Internal documents from IBM, for
highlighted as one company after another decided example, indicate that the company was very aware of
to close down its factories and move work abroad. the sensitive nature of its investment decisions. One
Maytag Corporation, for example, announced that memorandum advised managers to “not be transpar-
it would close its Galesburg, Ill., refrigerator plant in ent regarding the purpose/intent” of plans to eliminate
late 2004, laying off some 1,600 workers and trans- jobs and to never use terms such as “onshore” and
ferring most of its work to Reynosa, Mexico, where “offshore.” Any written communications with dis-
workers were paid about one-sixth of the wages placed employees must be “sanitized” by the human
earned in the U.S.28 resources staff before being released.33
Although the federal government fails to col- Although the public controversy over job loss due
lect detailed statistics that enable policymakers to to offshoring subsided after the 2004 presidential race,
determine how many American jobs are lost to out- the practice itself accelerated, affecting a wider swath
sourcing, independent research studies reveal the of industries and occupations. Duke University and the
scale of the problem. By collecting and analyzing Conference Board surveyed 1,600 service companies
press reports, Cornell University researchers com- in 2008 about their future investments and discovered
pared documented offshoring cases during the first that 53 percent had formulated a corporationwide
quarter of 2004 with the same period in 2001 and offshoring strategy—more than twice the number
found a huge increase: Between January and March that had done so in 2005. Moreover, 60 percent of the
2004, more than 48,000 jobs were shifted to Mexico, firms that engaged in outsourcing in 2008 intended to
China, India, Latin America and Asia. “Based on our expand those activities over the next three years. Few
estimates that media tracking captures approxi- expected to shift jobs back to the U.S. Ominously, all
mately two-thirds of production shifts to Mexico of the industries tracked in the study between 2005
and about a third of production estimates to other and 2008 had increased their use of offshoring, with
countries, these data suggest that in 2004, as many the practice growing most rapidly in the sectors that
as 406,000 jobs will be shifted from the U.S. to other had not previously engaged in the practice in a signifi-
countries compared to 204,000 in 2001,” the report cant way. The information technology industry had
concluded.29 Across the U.S., 8 million manufacturing the highest proportion (57 percent) of firms with an
jobs were eliminated between June 1979 and Decem- offshoring strategy, followed by software development,
ber 2009, according to Bureau of Labor Statistics engineering, marketing and sales, call centers, and
information analyzed by High Road Strategies con- finance and accounting companies.34
sulting firm.30 When the Wharton School at the University of
Pennsylvania and CareerBuilder.com, a job-hunting
website, commissioned a study of companies and
Outsourcing Goes Underground employees in multiple industries, they found that 13
percent had sent jobs overseas. Older workers, the
In the wake of the huge 2004 controversy regarding survey found, were more vulnerable to displacement
outsourcing and increased public scrutiny, corpora- than younger employees. What happened to those
tions have become more secretive about their invest- who were dismissed? Seventy-one percent were fired,
ment plans. “The public debate over offshoring has while the others were moved to other positions in
probably made corporate executives much more the company. Calculating how much money their IT
careful about how they communicate their consid- companies would save by offshoring, 85 percent of
eration of offshoring,” an official with A.T. Kearney, the companies estimated they would save from $5,000
an offshoring consulting group, told The Wall Street to $50,000 per head. The survey, conducted by Har-
Journal.31 “US corporations that use offshore service ris Interactive, contacted 3,016 hiring managers and
providers often prefer to keep it quiet,” confirms 6,704 individual employees.35
10As the Great Recession has worn on, outsourc- Great Recession. Corporations expect to eliminate
ing American jobs to foreign locations has gener- nearly 3.6 million general and administrative jobs
ated enormous corporate revenues. Between 2007 by 2014 as they execute their activities in low-cost
and 2009, offshoring yielded $30 billion in revenues regions where high-skill workers are available. With
worldwide and grew by 25 percent, according to remarkable candor, Hackett’s top research officer
data compiled by IDC, a market intelligence firm.36 summarized the implications: “Hackett believes that
Many large multinational corporations remain for most companies, if and when they do start to
committed to shifting production overseas. A 2008 restaff in IT, finance and other functions coming out
survey of 66 large multinationals by Watson Wyatt, of this recession, the large majority of the jobs they
a human resources consulting firm, found that 42 create will be in India and other low-cost labor mar-
percent were likely to offshore their production to kets.”41 The Everest Research Institute agreed with
low-cost countries, in addition to reducing their this assessment of the post-recession environment,
human resources head count in their headquarters predicting that 90 percent of large adopters (those
(26 percent) and chopping the cost of administering companies with more than 2,500 full-time equivalent
employee benefits through outsourcing (22 per- [FTE] positions already offshore) would expand their
cent).37 Like many such consulting operations, offshoring profile by more than 500 additional FTEs.42
Watson Wyatt derives revenues from providing ser-
vices related to “outsourcing solutions” and devising
“call center strategy.”38 An Elusive Topic
Corporate “back-office” jobs in finance, infor-
mation technology (IT), human resources and Though these consultant reports provide a glimpse
procurement are increasingly popular targets for of the extent of offshoring in service industries, the
offshoring by global companies. After surveying full impact of offshoring on domestic employment
the largest Global 1000 corporations, the Hackett remains an elusive topic. This is due, in part, to
Group predicted in 2009 that companies would severe deficiencies in how the federal government
shift more than 350,000 back-office positions over- collects statistics that could be used to adequately
seas at the same time as those firms acted to limit identify the scale of the job loss involved. A special
new employment and dismiss domestic workers. report by the Bureau of National Affairs reviewed
By 2010, this acceleration in offshoring would bring studies of the data collection problem by the U.S.
the total number of such back-office jobs to 800,000 General Accounting Office, the Massachusetts I
and allow companies to save nearly $30 million per nstitute of Technology (MIT) and the National
year. By 2010, Hackett expected one in four IT jobs Academy of Public Administration; it found that all
in global corporations to be located offshore.39 three groups “concluded that data collection struc-
Lowering the cost structure by moving to low- tures maintained by BEA, the Census Bureau and the
cost countries has become part of the mainstream Bureau of Labor Statistics prevent any meaningful
of global business models, a Hackett manager understanding of the scope of offshoring, the scale of
asserted, with U.S. workers losing jobs accordingly. U.S. job losses, the business and occupations being
“Companies are clearly taking aggressive action, affected, and the economy’s potential responses to
accelerating the pace of their globalization efforts, unabated offshoring.”43 Although a series of congres-
particularly in finance and IT, while at the same sional hearings were held during the Bush admin-
time implementing hiring freezes and/or staff cuts istration to examine the data collection problem,
for their other back-office staff positions,” affirmed no improvements were forthcoming. What was the
Chief Research Officer Michael Janssen.40 reason for this inaction? The senior researcher who
According to another Hackett Group survey of wrote the MIT report attributed the lack of concern
4,000 global companies with $1 billion in revenues, to “the Bush administration’s general opinion that
corporate outsourcing trends will continue and additional data on globalization would only lead to
accelerate as the global economy pulls out of the protectionist political responses.”44
11In the absence of comprehensive government- Although American corporations have made a
collected data, estimating the impact of offshoring concerted effort to conceal their outsourcing of jobs
often relies upon the sort of painstaking compilation to foreign, often low-cost, countries, it is clear that
of media announcements undertaken by Cornell offshoring has continued and accelerated in recent
University and Working America, as well as informa- years—at the same time the wages of American
tion from another reliable source: figures compiled workers have stagnated and mass layoffs and job
by the foreign governments that are promoting the cuts continue to ravage many communities. Recent
movement of jobs into their countries. This source is public opinion polls show that American voters rec-
especially fruitful with regard to India. In the business ognize the connection between offshored jobs and
process outsourcing (BPO) field, India and the Philip- their own diminished employment opportunities. An
pines account for 50 percent of the market.45 August 2010 Heartland Monitor survey sponsored by
India’s major service offshoring trade group, the Allstate and the National Journal asked Americans
National Association of Software and Service Compa- what actions government and business might take
nies (NASSCOM), expects that in fiscal year 2010, to help the U.S. economy recover from the reces-
direct employment in Indian companies focused on sion. According to 66 percent of respondents, an
outsourced work will reach 2.3 million workers, a extremely or very important action business could
dramatic increase from 830,000 in 2004. Aggregate take was to shift more of their operations back from
revenues that year are expected to rise to 73.1 billion foreign countries into the U.S. In order to help the
in U.S. dollars. The export of services and software economy move out of the recession, nearly three out
development employs 1.8 million workers and of four Americans (70 percent) agreed that it was
accounts for more than 99 percent of exports, accord- extremely or very important to reduce the “number
ing to NASSCOM; overall, they report, India controls of jobs that are outsourced to workers in foreign
51 percent of the offshored services market. 46 countries.”47
IBM: Outsourcing Out of Sight
International Business Machines (IBM) has been a global leader in technology for decades.
More recently, it has become a leader in the twin practices of outsourcing jobs and of
hiding that activity. In 2005, IBM and its wholly owned subsidiaries reported 329,000
employees worldwide. Almost 134,000 of those workers—more than 40 percent—were
located in the United States. At the end of 2009, though IBM’s workforce had expanded
to include almost 400,000 employees worldwide, only 105,000—just over a quarter of its
entire workforce—were located in the United States. IBM is reported to now be the sec-
ond largest employer in India, with 120,000 to 130,000 workers.
The movement of IBM jobs overseas is difficult to track due to the corporation’s focus
on secrecy in this area. Though IBM’s domestic operations have shed a net total of nearly
30,000 employees since 2005, the company simply reports its nationwide total cuts,
trimming smaller numbers from scattered sites to avoid triggering mass-layoff notifica-
tion laws. The company no longer reports its employment numbers in geographical terms,
making it difficult to discover where the company is hiring or where U.S. jobs go when
taken offshore.
IBM workers whose jobs have stayed in the country have seen reduced benefits and
lower pay—new facilities opening in the U.S. are paying up to $20,000 a year less than
older centers paid. Meanwhile, CEO Sam Palmisano made over $21 million in 2009 while
cutting 10,000 U.S. jobs during the deepest recession since the Great Depression.
12Section Two
Effects of Offshoring: Erosion of services and software) in local economies. It also
America’s Manufacturing Base drives productivity, innovations in new technology
and overall economic growth.
T he continued outsourcing of American jobs
to foreign countries is part of a pattern of
corporate policies toward international trade Declining Manufacturing,
that have eroded the country’s manufactur- Rising Trade Deficit
ing industrial base to the point that industry
specialists, military leaders and policymakers Manufacturing employment fluctuates with the
question whether national security is at risk. business cycle, dropping during recessionary peri-
Manufacturing’s share of U.S. Gross Domestic ods, and then increasing as the economy recovers.
Product (GDP) has fallen steadily since the late But the peaks have been lower from one recovery
1960s. The utilization of manufacturing capac- to another since the late 1970s. The overall trend is
ity dropped to 67 percent in 2009, the lowest dramatically down: Manufacturing employment col-
point in four decades. The U.S. trade deficit lapsed from a high of 19.5 million workers in June
has ballooned in recent years as more imports 1979 to 11.5 workers in December 2009, a drop of
flow into the country than American producers 8 million workers over 30 years. Between August
export abroad. The trade deficit with China, for 2000 and February 2004, manufacturing jobs were
example, far exceeds that with any other coun- lost for a stunning 43 consecutive months—the lon-
try, reaching $268 billion in 2008, more than gest such stretch since the Great Depression.
triple the level in 2001 (when the U.S. Congress The number of manufacturing establishments
granted China permanent normal trade relations has declined sharply since 1999, after growing
and China joined the World Trade Organization). steadily earlier in the decade. The total number of
The existence of large, chronic U.S. trade deficits manufacturing establishments of all sizes grew by
across the board—even in many of the most nearly 26,000 between 1990 and 1998 but shrank
capital- and knowledge-intensive sectors— by more than 51,000 (12.5 percent) between 1998
indicates that, whatever the fortunes of its mul- and 2008. An additional 5,730 establishments dis-
tinational companies and their global production appeared in 2009, bringing the total net decline
networks, the United States is losing competitive- to more than 57,000 since 1998. Every major
ness as a site for manufacturing.48 manufacturing sector experienced a net loss of
Manufacturing is vital for fostering a strong large establishments with 500 or more workers in
domestic economy, generating good jobs at this period. These trends are notable because of
family-sustaining wages and salaries, and guaran- the large numbers of workers affected, as well as
teeing a decent standard of living for America’s the disproportionate economic impacts on com-
working families. Manufacturing firms large and munities when production facilities close. The data
small are mainstays of state and local economies, show that every single major manufacturing sector
providing jobs and tax revenues to finance essen- experienced a loss of such large establishments
tial public services. Manufacturing generates after 1998.49
greater economic activity in other sectors that One of the chief indicators of declining global
supply intermediate goods and services and stim- competitiveness is the extent to which imports
ulates the creation of numerous jobs in high-end from facilities located abroad have penetrated
services (such as professional and engineering a country’s domestic markets. As U.S.-based
13corporations have intensified their practice of off- gerous erosion across nearly all manufacturing indus-
shoring, closing production plants here and open- tries. Short profiles of two critical industries, semicon-
ing up new facilities overseas or “nearshoring” in ductors and aerospace, reveal the impact of corporate
Mexico and Latin America, imports of thousands decisions on America’s competitive position.
of products have flooded American consumer mar-
kets and steadily pushed out domestic alternatives.
The import penetration rate (IPR) measures this Semiconductors
dynamic, showing how imports have substituted for
domestically produced goods. A large IPR indicates The manufacturing of semiconductors, the founda-
that a large share of U.S. consumption of a good is tion of modern electronic devices, plays a prominent
being met by foreign sources. The U.S. Business role in the U.S. economy as a source of high-value-
Industry Council (USBIC) Education Foundation added production, high-wage jobs, productivity
has calculated IPRs for 115 high-tech, capital- gains and wage growth.52 However, while the United
intensive industries, including every manufactur- States remains one of the world’s largest manufac-
ing sector judged to be a major contributor to the turers of semiconductors, it has been losing capac-
nation’s economic health.50 ity and its leadership in this industry for a number
The figures on this head-to-head competition of years. William J. Spencer, chairman emeritus of
between U.S.- and foreign-based producers in the International Sematech, summarized industry and
same U.S. market reveal that American produc- government leaders’ concerns about this troubling
ers have lost significant ground. The data show an trend: “A combination of market forces and foreign
across-the-board aggregate increase for 114 high- policies is creating powerful incentives to shift new
tech and capital-intensive sectors of 61 percent— chip production offshore. If this trend continues,
from 21.4 percent of domestic consumption to 34.3 the U.S. lead in chip manufacturing, equipment and
percent—between 1997 and 2007. That is, imports design may well erode, with important and unpleas-
grew from one-fifth to more than one-third of the ant consequences for U.S. productivity growth and,
total value of this large, diverse group of items con- ultimately, the country’s economic and military secu-
sumed domestically. This deterioration occurred in rity.”53 These warnings were echoed in reports by
only one decade. the National Security Agency, as well as by indepen-
High trade deficits and high IPRs are closely dent bodies, such as the National Academies of
related. Generally speaking, increasing trade deficits Sciences54 and the U.S. China Commission.55 Indus-
in goods are a result of U.S. consumers becom- try groups, such as the Semiconductor Industry
ing dependent on foreign-produced manufactured Association,56 and congressional leaders agreed.57
goods at the expense of domestically produced Increasingly, the erosion predicted in the mid-
items. That is, foreign producers have captured 2000s has become apparent. The semiconductor and
greater and greater shares of domestic markets other electronic component manufacturing sector
while U.S. manufacturers cut capacity and/or moved lost a net of nearly 1,200 plants of all sizes between
their operations offshore and dismissed workers. 1998 and 2008, a drop of 17 percent, including 83
The Economic Policy Institute (EPI) has estimated large establishments with over 500 employees. The
that millions of U.S. jobs have been displaced (or U.S. share of global semiconductor capacity has con-
job gains foregone) as a result of international trade, tinued its descent, dropping to 17 percent in 2007
including the losses associated with specific trade and 14 percent in 2009, falling to fourth place in the
agreements, such as the North American Free world behind Japan, Taiwan and Korea.58 In Decem-
Trade Agreement (NAFTA).51 ber 2009, the BLS forecasted that U.S. semiconduc-
The broad domestic and global economic trends tor manufacturing will lose 146,000 jobs, a decline of
examined by High Road Strategies’ research pro- 34 percent, over the coming decade.59
vides strong evidence that the U.S. manufacturing Driving these losses has been the growing
base is experiencing a sustained and potentially dan- migration (offshoring) of critical microelectronic
14Top 25 Products with Largest IPRs in 2007
Description 2007 1997 % Change
1997-2007
Household furnishings 93.5 23.2 303.3
Pulp mill products 92.7 45.2 105.0
Newsprint mill products 90.6 54.3 66.8
Medicinals and botanicals 85.8 49.5 73.3
Industrial valve manufacturing 78.2 34.4 127.3
Plastics and rubber industrial machinery 77.3 43.4 78.2
Metal-cutting machine tools 76.9 58.6 31.3
Metal-forming machine tools 76.6 62.7 22.1
Turbines and turbine generator sets 71.1 25.4 179.8
Speed changers, high-speed drives and gears 70.7 38.5 83.6
Electric computers 65.5 13.9 370.3
Computer storage devices 64.9 66.7 -2.7
Telephone switch apparatus 64.5 17.7 265.3
Radio and TV broadcasting and wireless equipment 63.0 16.1 291.0
Electric capacitors and parts 62.1 69.1 -10.0
Electronic resister manufacturing 61.8 47.5 30.0
Other electric components 58.2 56.9 2.2
Industrial process control instruments 58.1 45.7 27.1
Magnetic and optical recording media 57.1 38.6 47.8
Motors and generators 56.7 28.4 99.9
Relays and industrial controls 56.3 24.1 134.1
Autos 56.0 50.4 11.0
Heavy-duty trucks and chassis 55.8 62.5 -10.8
Motor vehicle parts 53.7 38.3 40.3
Aircraft engine and engine parts manufacturing 52.4 40.0 31.0
Average Top 25 IPRs 68.0 42.0 61.7
Source: USBIC High Road Strategies
manufacturing capabilities to low-cost foreign loca- their assembly, testing and packaging to Asia in
tions, which many observers warn will result in a loss the 1960s and continued to the 1980s. Then, in the
of “trusted” and “assured” supplies of high-perfor- 1980s and 1990s, U.S. companies shifted their fabri-
mance microchips used in critical military and com- cation abroad, contracting with offshore fabrication
mercial infrastructure applications. The primary ben- plants—in Taiwan, China, Malaysia, Philippines—
eficiaries of these movements are Taiwan, Singapore, to produce semiconductor wafers from designs.60
China, Korea and Japan, which have been increas- Firms outsourced virtually all manufacturing opera-
ingly challenging U.S. technological leadership. tions, including chip fabrication, assembly, testing
U.S. semiconductor manufacturers first moved and process development.
15A U.S. Government Accountability Office States.65 These include many firms in the semi-
(GAO) report noted two consequences of the shift conductor and electronic products, printed circuit
in production and trade flow toward Asia. First, boards, machine tools, advanced materials and bear-
because “final production increasingly takes place ings industries.
in Asia, the United States is importing an increasing Aerospace is a major source of high-skill, high-
share of electronics and telecommunications prod- wage jobs in the U.S. economy. It employs 500,000
ucts (that use semiconductors).” This is reflected workers, accounting for 4 percent of the nation’s
in the growing U.S. trade deficit with Asia, and manufacturing workforce. The trends over the past
China in particular, including advanced technology decade, however, show substantial shrinkage of this
products. Second, “as electronics and telecom- workforce over the past two decades, due to a variety
munications production chains increasingly locate of factors affecting both the commercial and defense
in Asia, there are benefits to U.S. producers of business sides of the sector.66 Following the end of
semiconductors to locate abroad near their custom- the Cold War, the large prime contractors—Lockheed
ers and take advantage of the production clusters Martin, Boeing, Raytheon, Northrop Grumman and
developing there.” As a result, there is a further General Dynamics—emerged as full-fledged multina-
incentive for U.S. firms to offshore their activities.61 tional corporations whose interests now transcend the
The semiconductor industry exemplifies the domestic industrial base. In order to grow and main-
problems created by the globalization of a key tain profit margins, these firms have become more
industrial sector for meeting critical U.S. national and more reliant on foreign sales. At the same time,
security needs. Natural disasters, for example, pose the drive to lower costs in the face of increasingly
a threat to the U.S. supply. The earthquake measur- fierce foreign competition, including offsets and other
ing 7.6 on the Richter scale that hit Taiwan in 1999 foreign trade practices, has led them to offshore large
shut down all factories in Hsinchu, the national portions of their own production operations and to
wafer fabrication center; such an event could rely on an increasingly global supplier base.
potentially disrupt supply.62 In addition, a poten- Employment levels and the number of establish-
tial threat to the security of classified information ments in aerospace have shifted in recent years. In
embedded in chip designs can arise from the shift the aerospace products and parts sector, a net 47
from U.S. to foreign integrated circuit (IC) manu- plants of all sizes disappeared between 1999 and
facturing. It increases the possibility that “Trojan 2004; midsized facilities suffered the greatest losses,
horses” and other unauthorized design inclusions, though 83 percent of all job losses were recorded in
such as viruses and worms, may appear in unclassi- the large plants that dominated employment in the
fied ICs used in military applications.63 industry. Employment in the aircraft manufacturing
and aircraft engine and engine parts manufactur-
ing industries fell by 15 percent each between 1998
Aerospace and 2008, mostly in large plants with 500 or more
employees.67 In 2002, foreign manufacturers cap-
Another core industrial sector fundamental to tured 15 percent of the domestic aircraft manufac-
America’s economic and national security is aero- turing market, 40 percent of the aircraft and engine
space. National security and space agencies consti- parts market, and 31 percent of the other aircraft
tute a major portion of the customer base for the part/auxiliary equipment market. By 2007, these
aerospace sector, which depends on an extensive shares grew to 33 percent, 14 percent and 45 per-
network of purchasers, subcontractors, suppliers cent, respectively.68
and partners, comprising the sector’s supply chain, A key strategy of aerospace companies is to
which provides parts and components to U.S. and secure new foreign sales through offset agree-
overseas manufacturers.64 The Aerospace Indus- ments. Offset agreements and transactions require a
tries Association (AIA) estimates that there are domestic exporter of articles and services to foreign
more than 30,000 aerospace suppliers in the United customers (government or commercial enterprises)
16to produce parts of the exported items in the for- fell more than 40 percent since 1990, dropping from
eign location or agree to the purchase of goods nearly 900,000 to less than 490,000 in 2010. Since
and services unrelated to the exported goods. For the last employment peak in 1998, about 15 percent
example, the Indian government has made manda- of jobs in this sector have been lost, probably per-
tory an offset clause for aerospace firms abroad, manently. The aerospace nonproduction and super-
requiring that at least 30 percent of the total visory workforce, which is inclusive of the science
value of a deal be manufactured in their country.69 and engineering (S&E) workforce, has suffered even
American defense firms have entered into offset greater losses, falling by more than half since 1990
deals with foreign governments for decades, but and nearly 30 percent since its 1998 peak.75
these arrangements have grown increasingly prev- Speaking before the U.S. House Armed Services
alent in recent years. Committee about the long-term decline in aero-
The rise of offsets as part of foreign sales trans- space science and engineering employment, Stanley
actions has led industry experts to express concern Sorscher, legislative director of the Society of
that the arrangements could adversely affect the Professional Engineering Employees in Aerospace76
health of the American aerospace industrial base. (the union representing over 20,000 engineers, sci-
Offsets have increased the pressure on U.S. firms entists, technical and professional employees in the
to offshore more of their operations, leading to the aerospace industry), testified that between 1986
loss of domestic manufacturing capacity and jobs, and 2001, the number of U.S. aerospace S&Es fell by
a trend that the United States-China Economic and 83 percent, from 145,000 to 21,000, and by another
Security Review Commission (USCC) warned could 5,000 by 2005, paralleling the 18,000 machinists’
“undermine U.S. global leadership in aircraft manu- jobs lost over this same period at Boeing.77 Sorscher
facturing.”70 Offsets can directly cost jobs in some partly attributes the losses in his workforce and in
companies that transfer work and manufacturing U.S. technological capacity to offset agreements,
capacity to foreign producers, under these agree- which enable foreign firms to “acquire the knowl-
ments, that otherwise would remain in domestic edge, skills and experience embodied in the work
facilities. The increase in aerospace-related offsets packages sent to their domestic firms.” These firms
also could lead to the rapid increase of imports of also “will inherit the competitive advantage of future
aerospace production, which also would adversely learning curve benefits. They will learn certain insti-
affect U.S. jobs.71 tutional lessons while our body of retained knowl-
Moreover, the growing demand for offset edge erodes,” he warned.78
arrangements by foreign countries is making Sorscher also noted Boeing’s aging technical
U.S. aerospace firms more reliant on foreign com- workforce and the “total elimination” of younger
panies. As the U.S. supplier base erodes, defense workers at the company as it has downsized. Thus,
contractors are becoming increasingly reliant on “lacking young people in the workplace, no one is
foreign suppliers for critical products.72 The out- present to capture and retain the body of knowl-
sourcing of the design and construction of wing edge accumulated from decades of experience.
and fuselage sections are at the root of Boeing’s The next generation of supervisors, managers and
recent production and delivery problems with its system integrators cannot be cultivated if they are
787 Dreamliner jet liner.73 Offsets also add to not present.” As a result, he concluded, “a 15-year
the financial pressures on U.S. firms that are period of experience has been forgone and cannot
increasingly reliant on foreign partners for finan- be recovered.”79
cial support.74 The implication of these trends in semiconduc-
The implications of these international trade tors and aerospace is that the U.S. industrial skill
arrangements are already becoming apparent in the and knowledge central to maintaining cutting-edge
aerospace industry’s workforce profile. The long- leadership in technology development and innova-
term employment trend has been downward since tion, in areas ultimately vital to maintaining the
the 1980s. Total aerospace and parts employment nation’s security and industrial base, have been
17deteriorating, both absolutely and relatively. Other encouraged U.S. manufacturers to move offshore nations are challenging American technological more and more of their operations, increasingly leadership, which ultimately rests on having access moving up the technological value chain, which has to a broad, robust foundation of manufacturing encouraged the migration of research and develop- and technological skills and knowledge. Many of ment (R&D) capacity and technological know-how these nations have implemented strategic industrial to other nations. Only a comprehensive strategy policies to strengthen their technological capabili- aimed at reversing the erosion in the nation’s over- ties, innovation and competitiveness built around all manufacturing base will be sufficient for pre- investments to attract and build a strong, modern serving and revitalizing the nation’s industrial base manufacturing base. U.S. policies, in contrast, have in the coming decades. 18
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