Obama’s call for bringing jobs back to the US is populist sloganeering and lacks economic foresight. Demands of the global market work against insourcing as a winning strategy
By Nayan Chanda, Published The Straits Times, 31 Jan 2012
THE American presidential election year has begun with a new mantra for business: insourcing. Bring back work that America sent abroad.
In his State of the Union address and campaign speeches, President Barack Obama presents it as a key strategy to boost economic recovery. But demands of the global market and changing technology work against insourcing as a winning strategy to restore the millions of jobs lost in the past decade.
To thunderous applause, Mr Obama declared that 'if you're a business that wants to outsource jobs, you shouldn't get a tax deduction for doing it'. He promised pain for the outsourcers and reward for the insourcers.
But the fact is that amid the populist rage in America about high unemployment and high profit of corporations, insourcing as a new strategy may garner votes, if not jobs.
In a recent gathering of industry leaders in the White House, Mr Obama hailed companies that are bringing jobs back to America. 'These companies are choosing to invest in the one country with the most productive workers, the best universities, and the most creative and innovative entrepreneurs in the world.'
To encourage companies to invest in the country he promised tax deductions. He also proposed that every multinational company should pay a basic minimum tax, while 'every penny should go towards lowering taxes for companies that choose to stay here and hire here in America'.
He praised automaker Ford, a lock-maker and a furniture manufacturer for bringing production back from Mexico and China, and also a software company for hiring local talent.
Patriotism is not the only impetus for bringing business home. Mr Obama himself noted the economic rationale that makes insourcing a smart move: rising labour costs in China and higher US productivity and larger American markets. Indeed the confluence of rising wages in China, and increasing costs of transportation as well as focus on high-tech industries may see a shift in outsourcing strategies. But the scale of its impact on job creation in the United States may be limited.
The limits of insourcing strategy were clearly evident even in the few examples of insourcing that Mr Obama offered. They amounted to just a few thousand jobs. An estimated 2.4 million jobs were lost to China because of the substantial cost advantage of cheap semi-skilled labour, abundant engineering and management skills, large manufacturing facilities, often with government subsidy, and the ability to scale up production and speed up delivery. For example, industry leader Apple has 43,000 employees in the US but uses 700,000 subcontracted employees abroad, mostly in China.
President Obama once asked Apple's late CEO Steve Jobs what would it take to manufacture iPhones in the US. According to The New York Times, Mr Jobs was blunt: 'Those jobs aren't coming back.'
The fact is that even if the wage differential narrowed, cost and production advantage and the benefit of locating R&D near manufacturing facilities and big markets, plus the cost of building new facilities in the US, would argue against bringing back major manufacturing facilities.
As company executives privately note, improving productivity and profit is their concern, not creating American jobs. Mr Obama's call for moral responsibility of businesses to help their own country may sway some but ultimately profitability will be the principal determinant of where in the world production would be located.
Technological advances have always been a key factor in the transformation of once dominant sectors of the economy. In 1900, some 41 per cent of American labour was engaged in farming: thanks to mechanisation it is just 2 per cent now.
In the past two decades, the share of manufacturing jobs in the total labour force dropped from 22 per cent to 9 per cent, thanks to automation and offshoring.
New types of manufacturing jobs that could be created in the US will require skills that Mr Obama himself admitted the country does not have. He said that half of manufacturing positions remain unfilled because the companies can't find workers with the right skills. He called on Congress to provide funds to train two million Americans with skills that will lead directly to a job. Given the deep political division, such a move could come only after the American electorate has given its verdict in November.
For now, insourcing remains a political slogan rather than an effective economic strategy.
The author is director of publications at the Yale Centre for the Study of Globalisation, and editor of YaleGlobal Online.
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