In age of outsourcing, do the old rules apply?

Most experts say globalization's benefits outweigh the costs, but some see altered equations

The trend has made globalization a dirty word even to many well-heeled professionals. It has made software engineering look like a risky major for American college kids. And it has made India suddenly relevant - in terms of US jobs and pocket cash, not nuclear warheads and Kashmir.

"Offshore outsourcing" is stirring anxiety, and with good reason. America's white-collar work force is experiencing the kind of vulnerability once felt mainly on assembly lines. Entire industries such as software have felt the shockwaves. Employers are signing up firms abroad to supply skilled services such as radiology and architecture.

Some economists, including erstwhile free-traders, now worry that the offshoring trend reflects a fundamentally new situation. Instant and cheap communication, coupled with the rise of millions of newly educated workers in low-wage nations, creates the risk of a rapid shift of jobs.

"It has never before happened," says former Reagan administration economist Paul Craig Roberts.

Most economists say the age-old benefits of unfettered global commerce still apply. But the rising debate could have far-reaching policy implications - possibly slowing the trend toward globalization that many credit with raising living standards worldwide in recent years. Now, even if the outsourcing threat is overblown, it could help put the brakes on globalization.

High wage earners, long the strongest supporters of free trade in the past, have lost much of their enthusiasm for it. Any new effort to liberalize trade could face a hard slog in Congress.

The rapid shift in national mood is reflected in a survey last month by the University of Maryland's Program on International Policy Attitudes. It found that 40 percent of Americans now see globalization as positive, down from 53 percent in 1999. Nineteen percent see it as mostly negative, and 39 percent are neutral.

Perhaps the most revealing shift is among high-income Americans. Only 28 percent of those making more than $100,000 a year support active promotion of free trade, down from 57 percent in 1999, according to a breakdown of the survey data sought by USA Today.

Most economists support freer trade, international investment, and a freer labor market - all enablers of offshore outsourcing. Though it may cause short-term job loss and other disruptions, the long-term effect is to raise living standards, they say.

But a few economists charge that economists' old trade theory no longer applies.

Mr. Roberts cites the classic theory of David Ricardo, a 19th-century British economist, that exports of a specific good would be won by nations with a "comparative advantage" in producing that good. A producer had better technology, cheap raw materials, low wages, more education, or some other advantage. All nations engaged in such trade would eventually benefit in higher living standards. But that thesis, says Mr. Roberts, hung on the idea that the "factors of production" - plants, equipment, etc. - are relatively hard to move. Increasingly, that is no longer the case.

After the cold war ...

The demise of communism and socialism has invalidated this old trade theory, Roberts says. Cheap labor in Eastern Europe, not to mention burgeoning China, has suddenly and eagerly joined the global work force. India, a long-socialist economy, has an added advantage: Millions of people with English skills.

In many cases, low shipping and communication costs make it feasible to produce abroad and send the output back to the US at a cost saving for the company.

"Any worker whose job does not require daily face-to-face interaction is now in jeopardy of being replaced by a lower-paid, equally skilled worker thousands of miles away," Roberts wrote recently with Sen. Charles Schumer (D) of New York.

About 14 million jobs, or 11 percent of the US total, are at risk of being sent abroad, estimates McKinsey & Co., a management consulting firm.

John Williamson, an economist at the pro-trade Institute for International Economics in Washington, calls the Roberts thesis "a load of nonsense." The US economy, when it is firing properly, creates more than 2 million jobs a year, enough to offset losses to India or other nations. And many of these jobs will be paying well.

The classic argument is that while trade costs some jobs, it helps create more by helping the overall economy grow faster. Consumers benefit as prices for goods and services drop. And in some cases, when a company locates some jobs abroad the costs savings allow other jobs to be created at home.

Moreover, economists of all stripes agree that US jobs are disappearing - and being created - for many reasons other than outsourcing. In manufacturing, for instance, the key factor behind job losses is rising productivity.

But that doesn't diminish the dislocation caused by outsourcing. And critics aren't confident that jobs lost overseas will be replaced by well-paid jobs in the US, especially in the short term.

William Baumol, a well-known trade economist at New York University, holds that the Ricardian model "needs extension and modification" to deal with today's outsourcing issue.

'Do something'

Globalization, he writes in an e-mail, "should enhance overall world welfare, but at the immediate and extreme expense of the workers in the US who lose their jobs or suffer wage cuts as a result ... it is indefensible to ignore these effects and fail to do something about them." Even in the long run, outsourcing "may reduce per capita US income or hold back its growth," he adds.

Dean Baker, an economist with the Center for Economic and Policy Research in Washington, says that outsourcing of jobs has been limited so far to those with less political clout. By going to politicians for protection, medical doctors in the US limit the number of foreign interns. US doctors' incomes are twice the average in most industrial nations. Lawyers have not standardized law sufficiently so far to let some jobs go abroad.

Politicians are trying to figure out if there are ways to discourage outsourcing without killing trade and international investment with its benefits.

Sen. Christopher Dodd (D) of Connecticut has introduced the United States Workers Protection Act, which would prohibit taxpayer dollars (tax deductions) from being used for offshore outsourcing related to work paid for with federal funds.

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