Why do discussions about world trade always bring out the Chicken Littles––those fearful commentators and “experts” who promise us, quite breathlessly, that America’s economy is about to be scuttled by “foreign” workers who “steal” American jobs?  Perhaps they don’t get the economics or just simply fear change.  But whatever the reason, the Chicken Littles have a knack for getting it all wrong. 

Twenty years ago, they warned that the United States could not compete with the highly-tuned, bureaucratically-managed economies of Europe and Japan.  In the 1990s, entire presidential campaigns were built around the idea that freer trade with Mexico and Canada through NAFTA would generate a “giant sucking sound” of jobs heading south of the border. 

Now, the Chicken Littles are at it again. Today, it is not the Japanese or Mexicans who threaten the jobs of Americans, but information technology (IT) workers living in India, the Philippines, and China. The threat?  These IT workers are being signed up by American companies that are shifting some functions such as customer call centers and software design overseas––a process known as outsourcing.  

Business Week, which should know better, recently dedicated an entire cover story to fanning these fears, complete with the ominous headline––“Is Your Job Next?”  Economist Paul Craig Roberts, among others, fretted that outsourcing has put the U.S. on track to becoming a “Third World country.” He actually warned of the day when “all” (all!) American manufacturing and IT jobs will be sent overseas. It seems we’re about to become a nation of hamburger flippers––again!

Today’s concerns about outsourcing are really just a dressed up version of protectionist arguments that date back centuries.  From an economic standpoint, the case in favor of free trade has been settled since the time of Adam Smith and David Ricardo.  Countries benefit from specializing in those economic activities in which they operate most efficiently and effectively and trading with other nations that concentrate in different areas.  Trade creates a virtuous cycle, raising the prosperity of all nations that keep trade barriers low and international commerce high. 

Where does outsourcing fit in?  Global sourcing allows companies to enhance their efficiency and increase their competitiveness by tapping into skilled labor at a lower cost.  Reducing costs benefits consumers through lower prices.  It also frees up capital to be invested in new job-creating ventures or new product innovations.   

The problem with outsourcing––as with many aspects of free trade––is more political than economic.  While the benefits of trade are widely dispersed, the job losses are readily identifiable.  And in a technology-driven global economy, California-based software designers may lose their jobs to competitors in Indiana or in India.  This provides an easy target for the anti-trade lobby. 

There are several reasons why their fears are overblown. 

First, there is the dynamism and resilience of America’s economy.  Our entrepreneurial system––in which open trade is a key component––is the most effective job-generating machine the world has ever known.  With a flexible workforce and new jobs constantly being created, displaced workers often have little trouble finding new employment.  Over the past decade, America has added 21.6 million new jobs in service industries, according to the Department of Labor’s Bureau of Labor Statistics.  By comparison, according to World Bank data, the sclerotic economy of Germany––so admired by yesterday’s Chicken Littles––has failed to create any net new jobs in a decade.

Second, governments can––and do––create safety nets to help workers displaced as a natural and legitimate byproduct of free trade.  Sometimes this takes of the form of government-sponsored retraining programs or extended unemployment benefits.  Of course, government intervention is often heavy-handed and the safety net can easily become a welfare trap, as the ossified economies of Europe demonstrate.  Nevertheless, these programs––especially if reserved for very specific and extreme cases––allow us to address the needs of displaced workers without dismantling the entire architecture of the world trading system and undermining one of the cornerstones of our nation’s prosperity.   

Instead of wringing our hands about outsourcing, we should remember that U.S. companies have much to gain from liberalized trade in services.  The United States has spent more than 20 years negotiating trade agreements to pry open international markets and reduce barriers to trade in services.  Due in part to the liberalized trade environment brought about by these efforts, export of services has increased 43 percent since 1994 and now accounts for $290 billion a year––nearly one-third of all U.S. exports.

The U.S. service sector is huge, dynamic and innovative, running the gamut from software design and telecommunications to financial services and health care.  Services generate as much as 80 percent of the nation’s GDP––on the order of $7 trillion or more in annual economic output.  That’s nearly the size of the next three largest economies (Japan, Germany, and the United Kingdom) combined.  As of last year, about eight out of 10 American private sector employees worked in one of 92 million service industry jobs. 

There have always been purveyors of doom and gloom who lack confidence in the dynamism of America’s entrepreneurial economy.  Some readers will remember that in the 1960s many “experts” debated how long it would take the Soviet Union’s central planners to “bury” our more chaotic capitalist economy––when, not if.  In the 1970s, the Saudis were going to use their oil wealth to buy up America companies.
 
These days, of course, the Soviet Union no longer exists. Saudi Arabia has also failed to deliver as the Chicken Littles promised. But I’ll give the Chicken Littles this: at least they’re consistent––consistently wrong. 

Robert W. Hahn is Executive Director of the American Enterprise Institute-Brookings Joint Center for Regulatory Studies.