The unwatched offshoring pot: Will it boil over?

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If the US economy is a busy kitchen, then offshoring - the shipping of American jobs abroad - is a simmering pot that gets little attention.

Occasionally, it spatters, causing a flurry of worry. But soon the cooks are back to more pressing issues. If nothing is done, however, the outsourcing pot could boil over, stir up protectionist forces, and lead to a big political backlash against globalization.

Already, pressure is building.

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For years, offshoring was almost entirely a manufacturing problem. Plants moved to countries where workers were paid much less. Unions protested. But it seemed to many like old-economy stuff, hurting a portion of the workforce that was dwindling anyhow. Then, services got hit. The attention, though, centered on low-wage workers in call centers, the principal targets.

And for all the hoopla, the numbers were small. In 2003, offshore employment was a mere 1.5 million of the 1.4 billion-plus positions in the worldwide service industries, according to a new study by McKinsey Global Institute (MGI). But the trend is picking up steam.

By 2008, an estimated 4.1 million service jobs will have left the shores of rich nations, the study projects. In theory, 160 million jobs, or 11 percent of the world's service workforce, could be done remotely by then, it says. But there are barriers to a rapid shift - language skills, competition within poor nations for talent, lack of mobility, etc.

Adding to anxiety: The jobs headed offshore have become more sophisticated, such as computer programming, architecture, and medical diagnosis.

"It's a lot of people to be displaced," says Diana Farrell, director of MGI.

Some fear service jobs could disappear as fast as manufacturing jobs. "Everybody knows that offshoring is picking up the pace," says Lori Wallach, director of Public Citizen's Global Trade Watch in Washington.

Overseas, the trend has pepped up economies. India's National Association of Software and Service Companies (NASSCOM) calculates India's offshoring business reached $17.2 billion in the fiscal year ended in March, up 34.5 percent from the year earlier.

India's 3,000 information technology companies export to 150 countries. Software sales alone rose to $12 billion from $9.2 billion the year before. The biggest customer by far was the US.

If such growth rates continue, and include other poor nations such as China, the impact of offshoring could exceed MGI estimates. India's NASSCOM already reckons India's outsourcing industry employs 1 million programmers and other skilled workers, and indirectly provides jobs to 2.5 million Indians in such areas as transport and catering.

Back in the US, offshoring is raising fears. It is one reason, experts say, support for free trade has faded so fast among service professionals. They had seen their jobs as impervious to foreign competition. No longer so, surveys show.

That could be one reason the Central American Free Trade Agreement sought by President Bush remains in deep trouble in Congress.

Offshoring could also be "a significant factor" in the relatively slow job growth after the 1990 recession in the US, holds Rob Atkinson, vice president of the Progressive Policy Institute, a Washington think tank for middle-ground Democrats. The loss of jobs to offshore sites has a "multiplier effect" on other jobs in the US, he adds.

Over the past three months, the rate of job growth has averaged 158,000 a month. "It should be in the 200,000 to 250,000 range," says Mr. Atkinson. "It's a puzzle to me why people are puzzled" with the slow job growth.

Offshoring not only means the loss of call-center jobs, but also puts pressure on wages for those jobs staying in the US, says Tony Daley, research economist at the Communications Workers of America. His union has been striving to organize more workers at call centers. So far, a mere 100,000 among more than 3 million or 4 million workers belong.

Defenders of offshoring often argue that the US benefits from outsourcing even more than it loses. US software firms and high-priced consultants in such areas as strategic business planning sell huge amounts of their work to foreign nations. Two economists at the International Monetary Fund, Mary Amiti and Shang-Jin Wei, calculate that the US net surplus in services has been growing recently. Last year, too, says Mr. Wei.

Whether that will be true in the future remains uncertain. Wei notes that outsourcing as a percentage of gross domestic product has been doubling every 10 years in recent decades.

One way to mitigate the problem, Atkinson and others say, is to offer service workers assistance under a federal trade-adjustment program launched in the 1960s. It gives money to those who lose job to imports of physical goods while they search and train for new jobs.

So far, however, the Bush administration has resisted efforts in Congress to extend such help to the service sector.

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