Demagoguery Aside, Outsourcing of Jobs Is a Real Threat to U.S.

Posted May 14, 2004 at 2:43pm

Two decades ago, the United States fell into a panic over economic competition from Japan — unnecessarily, as it turned out. Now, there’s concern about “outsourcing” to China and India. But this time the fears might be justified.

“Japan Inc.,” as it was called in the 1980s, did not come to dominate the world economy, partly because the nation’s banking system was inefficient, partly because the Japanese proved better at copying technologies than inventing them, and partly because U.S. businesses got scared enough to put resources into boosting their productivity. [IMGCAP(1)]

But now there’s reason to fear that the United States could lose its technological leadership to India and China, two countries that are exploiting their cheaper wage rates, huge domestic markets and (to a certain extent) educated work forces to attract high-tech industries and research business from the United States.

A number of new studies warn that, while the United States still leads the world in scientific innovation, we’re in danger of losing our advantage — and with it, the millions of highly skilled jobs on which U.S. prosperity depends.

The demagogic rhetoric of this presidential campaign has hyped the immediate threat to the U.S. economy from outsourcing of manufacturing jobs. However, the outsourcing of high-tech service jobs may become a real menace over the long term.

Despite the accusations — since toned down — by Sen. John Kerry (D-Mass.) that the Bush administration was encouraging “Benedict Arnold corporations” to send jobs abroad, the respected Forrester Institute estimates that only 300,000 of the 2 million jobs lost during the Bush presidency have gone offshore.

And while CNN’s Lou Dobbs warns almost nightly that America is in danger of becoming a “Third World country” unless we adopt protectionist policies, economic guru Peter Drucker has estimated that more jobs are being created in the United States by foreign investors — what one might call “insourcing” — than have been lost.

Such statistics make some conservatives complacent. But a new report by the National Science Foundation is one of several that indicates American leadership may not last forever.

“The United States is in a long-distance race to retain its essential global advantage in science and engineering human resources and sustain our world leadership in science and technology,” wrote Warren W. Washington, chairman of the NSF’s National Science Board. “The outlook for the future [is] uncertain.”

In January, the President’s Council of Advisors on Science and Technology warned that “while not in imminent jeopardy, a continuation of current trends could result in a breakdown in the … U.S. innovation system.”

And a just-published study by the Electronic Industries Alliance concludes that “unfortunately, the U.S.’s ability to adapt, compete and innovate alongside emerging workforces in countries such as China and India is threatened by a systematically weakened education system, a dearth of R&D funding, visa policies that discourage the brightest foreign minds and a business climate heavy with regulatory and tax burdens.”

All the studies agree that China is graduating three times the number of engineering students each year as the United States. Nearly half of all Chinese undergraduate degrees are in scientific fields, compared to 5 percent in the United States.

Meanwhile, software engineers in India make $7,000 a year, versus $64,000 in the United States. India and China are making aggressive efforts to attract tech-based business from the United States — and they are succeeding.

A paper presented last week by Sen. Joe Lieberman (D-Conn.) at a New America Foundation symposium notes that “in 2002, China surpassed the U.S. as the most preferred location for foreign direct investment. In 2003, a record $53.5 billion flowed into China … [while] FDI [in the U.S.] reached its lowest level in a decade. Investment in the U.S. plummeted from $300 billion in 2000 to $30 billion in 2002.”

According to Lieberman, “job offshoring is no longer restricted to basic service tasks such as data entry and processing — it has expanded to sophisticated work such as knowledge services, decision analysis, design, engineering, research and development.”

Lieberman said that “we are not just losing manufacturing jobs. We may be losing critical parts of our innovation infrastructure and with it our competitive edge in the global marketplace, endangering our prosperity and national security.”

He blamed Washington politicians for responding to the crisis “all too predictably,” with the Bush administration adopting a “laissez-faire attitude that the markets and tax cuts will solve the problem,” while “others” — his fellow Democrats — advocate protectionist trade policies.

Lieberman and the EIA’s president, former Rep. Dave McCurdy (D-Okla.), recommended a set of solutions that include more federal and private investment in R&D; a more expansive safety net including job training for displaced workers; bigger investments in science education; stiffer enforcement of trade laws; and faster approval of visas for high-tech foreign workers and students.

Their list specifically did not include tax penalties, as recommended by Kerry and other Democrats, to keep “Benedict Arnold companies” from investing offshore. Kerry lately has said that the phrase was invented by “overzealous speechwriters,” but he has used it dozens of times during the primary campaign.

Bush administration officials protest that they are not “doing nothing,” as Lieberman alleged, but rather are stepping up funding for science, education and job retraining and “engaging” China on trade violations. But Democrats — and some Republicans — contend the steps are inadequate because of overemphasis on tax cuts.

Lieberman points out that, 20 years ago, President Ronald Reagan addressed the Japan panic by appointing a commission headed by John Young, CEO of Hewlett-Packard, which produced a report that did much to spur U.S. corporate productivity — gains that, in turn, enabled the boom of the 1990s.

Lieberman plans to introduce legislation soon to create a 2004 version of the Young commission to lay out steps for dealing with the China-India challenge. America has always shown that it can handle global economic competition — but sometimes it needs a scare to do it. It’s time to be scared.