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"The U.S. Jobs and Trade Debate: Why Outsourcing is Good for America" by Thomas J. Donohue

Tuesday, June 29, 2004 - 8:00pm

On: "The U.S. Jobs and Trade Debate: Why Outsourcing is Good for America"
To: San Francisco, CA  
From:Thomas J. Donohue
Date: June 30, 2004
 

San Francisco, CA
June 30, 2004

***As Prepared For Delivery***

Thank you, Lee. It's great to be in California. I try to get out here as often as I can. In fact, I've come directly from the Chamber's biannual Committee of 100 meeting held here in the city and also in Sonoma.

The committee consists of the CEOs of the Chamber's top 100 association members. These meetings give us a chance to talk about challenges and opportunities common to all of the industries we represent.

We had a great turnout. I'd like to think it was because of the interesting program and provocative speakers.

But the location and the opportunity to take batting practice at SBC Ballpark might have had something to do with it as well. I learned that the CEOs of several Washington associations are still holding onto their childhood dreams.

One reason I enjoy visiting California is that Liz and I used to live here – right outside of San Francisco in fact. That was when I was Assistant Postmaster General, responsible for the 14 Western states. Our third son was born here. So we always look forward to the opportunity to come back.

Like many Americans, we also look to California to catch a glimpse of the future – in business, technology, politics, demographics, and popular culture. In recent years, California has also been a place to spot emerging problems and challenges.

I don't have to tell you that by many measurements California has raced ahead of the national average in over-regulation, excessive litigation, high costs, and anti-competitive policies.

The Governor and the legislature are now working hard to build a ladder to climb out of a deep hole. Good progress has been made in areas such as workers compensation reform, but much remains to be done.

Success depends on many things, but above all, California must remain fully engaged in the global economy, learning how to better compete worldwide and resisting any retreat to the failed policies of protectionism and isolationism.

California became one of the 10 largest economies in the world mostly because it is such a gigantic global trader.

People from around the world are eager to buy California-produced goods and services, everything from computers and electronic goods to agricultural products and entertainment.

When you combine service exports with manufactured exports, California is the largest exporting state in the nation – though it recently lost its long-time lead to Texas on the products side of the equation.

Were it not for international trade, more than one million Californians would not have the jobs they have today.

However, I'm here to warn you that the future of California's economy—and the U.S. economy as a whole—is greatly challenged by a movement to restrict the ability of U.S. firms to fully compete in the global marketplace.

This effort is being waged in Washington, D.C., on the campaign trail, and in state capitals around the country, including Sacramento.

I'm talking about efforts to prohibit or discourage global sourcing—a long held practice that began in manufacturing and is now encompassing some service jobs as well.

Why do some U.S. firms elect to hire overseas workers —and to what extent is this phenomenon happening? What are the benefits to global sourcing versus the costs? And, perhaps most importantly, what are the proper responses to it?

My good friend John Sweeney, head of the AFL-CIO, was here to talk about this issue a couple of months ago.

For those of you who heard that speech, I can assure you that I will offer a slightly different perspective.

Why outsourcing – and how much of it are U.S. firms doing?

The concept of outsourcing is nothing new. In making a product or delivering a service, businesses have always depended on the core competencies and expertise of other companies to make their products better at a lower cost.

Take, for example, car manufacturers. They don't make tires or spark plugs. Instead, they depend on their suppliers to do that for them because the suppliers can do it better and more efficiently.

The carmakers then put all the pieces together to form the final product that we drive away from the dealership.

Well, the same thing is happening now on a wider scale. Most of the time, the work that is farmed out by a company stays within the same zip code, the same state, or the same country.

In fact, the greatest, most significant wave of outsourcing ever to occur anywhere was the massive movement over the last several decades of the 20th century from the so-called rust belt to the so-called sun belt of our own country.

As Californians join the debate over the current wave of outsourcing, they would do well to remember that perhaps no other society in the world has benefited more from the migration of money, people and jobs than California.

Today, however, California is suffering from "reverse outsourcing" – for the reasons I mentioned earlier.

The competition is not only coming from Nevada and Arizona but from around the world.

We are seeing that higher educational levels, advanced communications, and economic and social reforms in the developing world have made it easier, more efficient, and more affordable to source offshore.

Information, ideas, and people are moving at speeds never before thought imaginable. As a result, the global marketplace has become a much tighter-knit community.

You can send an x-ray to a radiologist or your tax return information to an accountant in India as quickly as you can to a radiologist or tax accountant in Los Angeles.

Young people from India to Ireland speak English and are familiar and comfortable with our culture.

These developments worry many Americans. I understand that. But if we're smart, we can make global sourcing work to our advantage. In fact, it already has.

Let's look a little closer at what we know – and don't know – about global sourcing.

First, it is important not to confuse jobs sent overseas with those that are disappearing from the economy altogether.

These jobs, mostly in manufacturing, aren't going to China or Mexico. They are going to a country you've never heard of—a country called "productivity."

Think about this: In 1980, it took 454,000 General Motors workers to build 5 million cars. Today, it takes 118,000.

Has this meant the death of American manufacturing? Not at all. A wide-angle view shows that manufacturing output has doubled in the past three decades.

More recently, the rise in industrial production last month was the sharpest in nearly six years. And manufacturing has created 81,000 net new jobs this year, proving wrong those who had written manufacturing's obituary.

We must also recognize that many companies establish facilities and hire workers in other countries in order to be close to important, emerging markets. These decisions have little, if anything, to do with outsourcing as it is customarily defined.

So how much offshore outsourcing is really going on? Nobody knows for sure. The government just started to monitor outsourcing. Private sector estimates are just that – estimates.

In the first government report, the Bureau of Labor Statistics found that just 2% of all mass layoffs in the first quarter of this year were associated with the movement of work outside the country.

Generally speaking, the rough consensus is that 300,000 to 500,000 service jobs have been moved so far and that an average of 250,000 per year could move over the next decade.

Now that might appear to be a lot of jobs, and surely the transition for workers whose jobs were moved is not easy.

But today, nearly 139 million Americans are employed – the most in history. The national unemployment rate, 5.6%, is low by historical standards.

Employers have added 1.2 million jobs since the start of the year. Hourly wages, real disposable personal income, and total compensation are all rising, defying arguments that we're becoming a nation of hamburger flippers.

Here in California, economic recovery and job growth has not been as robust as in other parts of the country, but there are signs, including rising personal incomes, that better days are ahead.

So, even with the economy churning out new jobs, and even if outsourced jobs are a small fraction of our overall economy, there are those that argue that one job sent overseas is one too many.

But the benefits derived from one displaced job far outweigh the costs.

Leading economists—both Democratic and Republican—agree that sourcing some work overseas allows companies to strengthen their bottom lines, reduce consumer prices, focus on more profitable operations, and create new and better jobs here at home.

The highest value-added jobs and the most advanced research and development efforts remain in the U.S.

Outsourcing also produces the added benefit of giving U.S. businesses greater access to new markets, which in turn boosts demand for our products and creates more jobs at home.

A couple of months ago I visited India, where some U.S. service jobs are going.

Last week, I was in Ireland, where some 570 American companies have established operations – not only for the purpose of sourcing but to be at the gateway of the massive markets of the newly enlarged European Union.

I saw firsthand highly-educated, well-trained young Indian workers manning call centers and performing office tasks for clients all over the world, including some U.S. clients.

I noticed that virtually all the equipment they use is American-made. In fact, everywhere you look, you can see a major U.S. presence in India in terms of our products, services, expertise and technologies.

95% of the world's consumers live someplace other than here, so we have to go to where they are.

We must also recognize that foreign companies source a tremendous amount of jobs to the United States. Outsourcing is a two-way highway—and the inbound lanes are far more congested than the outbound.

Last year, the U.S. enjoyed a $60 billion surplus in services trade, which means foreign-owned companies hire far more accountants, financial services people, lawyers, sales and marketing folks, and other white collar workers here in the U.S. than we hire in other countries.

Foreign companies have invested a total of $487 billion in the U.S., directly creating 6.4 million jobs and indirectly creating tens of millions of additional jobs.

The multiplier effect is enormous. Consider Toyota, which has a major presence in California. The company directly employs some 30,000 American workers, but that rises to 189,000 when you add the dealers, parts suppliers and others.

California receives more foreign direct investment than any other state - more than $100 billion. That translated into more than 700,000 jobs in 2003!

This is why restricting the ability of U.S. companies to source globally is so risky. It would invite reprisals from our trading partners, undermine our competitiveness, and threaten our global leadership. No state would pay a higher price than California.

The Chamber is leading the effort to stop legislation, regulations, and executive orders that seek to punish firms for contracting with foreign businesses.

No fewer than 38 state legislatures already have or currently are considering anti-outsourcing proposals, and California is a key battleground state.

Lawmakers in Sacramento are considering 9 anti-sourcing bills that would, among other things:

  • Penalize qualified companies from bidding on state and local contracts;
  • Impose additional regulatory burdens by requiring businesses to provide the state and their workers with employment data;
  • Drive up health care costs and cause claims processing delays by limiting medical information that can be processed overseas; and
  • Expose businesses to excessive, and possibly frivolous, litigation by adding a private right to action if a company fails to protect personal information that is sent overseas – even if no harm is done. There are already strong protections in place and tough penalties for privacy violations, whether they occur domestically or internationally.

These proposals could, if enacted, steer California's economic recovery off course. Without fail, businesses go to where they can earn the best return on their investment.

Already, four in ten California companies say they are planning to move jobs out of state because of the high costs of doing business here. These new rules, regulations, restrictions, and liabilities could provoke a rush to the doors.

Now let me say that the often misinformed debate over outsourcing has produced one good result – it has prompted a heightened focus on steps we must take here in the United States to create and keep more good paying jobs here at home.

We won't do it by building barriers or by punishing companies for trying to be more efficient and profitable. We can do it by addressing the structural impediments that hurt job creation and threaten our future prosperity.

We have to bring under control frivolous class action lawsuits that suck more than $233 billion out of our economy every year.

The Senate can take a major step forward by passing class action reform, which is expected to come up for a vote in the very near future.

We must ensure that our businesses have access to reliable and affordable energy supplies, particularly natural gas, whose high prices have forced some chemical manufacturing plants and others to leave the country in search of more affordable supplies.

In addition to increased production, we must also upgrade our energy infrastructure, especially our electricity grid, so that energy delivered to our homes, businesses and factories is not disrupted.

Reforming an antiquated tax system that puts American companies at a global disadvantage, upgrading a transportation system that is overburdened and in disrepair, and getting a handle on health care costs are all important steps to enable businesses to grow and create jobs in the U.S.

So, too, is cutting down on the number of unnecessary and overreaching government regulations, especially in California, which has the most costly, complex, and uncertain regulatory environment in the nation.

We must also make serious improvements in the education and training of our workforce.

When the Chamber recently prepared and released a special report on jobs, trade and outsourcing, we learned or reaffirmed many things – but two stood out.

First, in just a few years, we're not going to be talking about a shortage of jobs – but rather a shortage of workers to fill available jobs. And second, that our nation is already being seriously outstripped by competitors when it comes to the education of our current and future workforce.

U.S. eighth graders rank 19th in the world in math, behind such competitors as Singapore, South Korea, Taiwan, Hong Kong, and Japan. In 2002, China and India graduated from college five times as many engineers as the U.S. That's just inexcusable.

Employers report that many job applicants and new hires cannot adequately read or write. And even well-educated employees must be trained over and over during the course of their working lifetimes due to constant changes in technology and the workplace.

In addition, staying on top of the value chain requires that America remains a leader in innovation and basic research.

Yet today we see decreasing expenditures in R&D at both the corporate and national levels, and the number of patents inside our country is lagging behind the number coming from abroad.

Making the R&D tax credit permanent, streamlining the visa system so that international students and experts can come here, and enabling our companies to repatriate overseas funds are all ways to rejuvenate research and development.

We must also continue to open markets for our exporters, who create the best and highest paying jobs. Today the European Union has 32 free trade agreements in force around the world. We have just five.

We need to become party to more bilateral, regional, and multilateral trade deals, enforce the ones we've already negotiated, and ensure that U.S. goods and services are protected from counterfeiting and intellectual property theft—and the Chamber has a major initiative underway to address these challenges.

We also need to reform immigration rules so that we add enough workers to meet the expected number of new jobs created over the next several decades.

This country needs to rethink its policies on who and how many people can come here to work and also reform entitlement programs so that they are available for our children and grandchildren.

Finally, I would be remiss if I didn't mention the negative impact some new regulations and tactics, advanced in the name of corporate governance reform, are having on job creation in this country.

I don't doubt for a second that some changes were necessary to restore investor confidence in business and financial markets following recent corporate scandals.

And I don't doubt that Congress genuinely thought the Sarbanes-Oxley legislation would achieve those objectives. In fact there were some good provisions in that bill.

Yet because of that law, companies have had to add financial staff and pay significantly higher auditing fees to comply with a maze of new rules.

One recent study by an industry group shows that the average compliance cost for large companies is $4.6 million, broken down into 35,000 hours of extra internal manpower, $1.3 million on external consulting and software, and $1.5 million in additional audit fees.

Every one of these dollars spent is a dollar diverted away from investment, research and development, and new hires—other than lawyers and accountants.

Sarbanes-Oxley has also taken a toll on business expansion and reasonable risk-taking. CEOs I talk to worry about making mistakes. They have delayed decisions and backed away from taking risks and making investments.

The result is a culture in which risk-taking, innovation, flexibility and quick decision-making – all trademarks of our economy – are no longer as highly valued as they once were.

We're also seeing some organizations, namely public pension funds, use corporate governance as cover to advance their own special interests – and no entity is guiltier than CalPERS, the nation's largest pension fund.

CalPERS, whose board is dominated by labor union interests, has announced it would withhold its votes to re-elect corporate board directors at 2,700 public companies on the basis of poor corporate governance.

For example, it launched a highly publicized move challenging Safeway – and the timing was suspicious to say the least.

The company had just been involved in a protected dispute with its union and it just so happens that the chairman of the board of CalPERS is a top official in that union.

Talk about conflict of interest!

The action taken by CalPERS shows that it is inspired less by corporate governance than by labor union leaders' desires to settle scores with companies they negotiate with.

And it is the taxpayers who are left holding the bag. While the fund's performance has recently improved, for several years it lagged behind similar funds.

Moreover, the board convinced the legislature to approve new retiree benefits. The resulting $2.6 billion gap between investment performance and program costs is the price California taxpayers must now pay.

The actions of CalPERS and other consequences of Sarbanes-Oxley are having the opposite of their intended effect – they are stifling innovation and job growth and hurting business confidence at a time when we need it most.

Two years after Sarbanes-Oxley, it's time we study the lessons learned and put the brakes on hasty corporate governance rulemaking.

That's why we are opposing the Securities and Exchange Commission's proposed proxy rule, which would allow significant minority shareholders to advance their own director candidates under certain conditions.

It's another tactic by labor unions and other anti-business interests to sabotage profitable businesses who don't do as they say.

Ladies and gentlemen, there must be no retreat to isolationism and protectionism. California and our nation have the most open markets in the world, and while some individuals are adversely impacted and must be helped, the overall benefits to our society have been overwhelming.

But as I have suggested, we must do more than simply fight misguided efforts to close markets and restrict global sourcing.

We must bring litigation, and regulation under control. We must improve our tax system and our infrastructure.

We must deal with the post 9-11 challenges of security without losing our mobility or our freedom.

We must insist that our trading partners join us in fighting counterfeiting and intellectual property rights violations – and the Chamber has a massive initiative underway on this problem.

We must continue to be a nation that welcomes law-abiding immigrants. We need them. And, we must improve education and training or we will no longer be able to lead in innovation.

Let me conclude by invoking the legacy of a respected and admired Californian – Ronald Reagan.

Not everyone agreed with his policies, but on this point I think most people agree: he greatly loved his country and was greatly optimistic about its future, even at a time when it was not easy to be so.

I think we could all use some of President Reagan's optimism and belief in our fellow Americans, our businesses, and our workers.

At a time when countries whose names we have trouble pronouncing or whose location we're not sure of are competing intensely with U.S. goods and services, we have to remember what made America great in the first place—innovation…ingenuity…and a strong belief in free markets and the global trading system.

The outsourcing debate is similar to a test that we've passed many times before. In the '70s and '80s, so-called economic experts warned that the U.S. was being overtaken by Japan and Germany. It never happened.

Today, some say India and China will overtake us. They haven't, and they won't.

Throughout our history, American business has responded to global competition by inventing, innovating, and developing the next great advances in human progress.

And, with policies that give U.S. businesses flexibility, I know we will do so time and time again.

I look forward to your questions. Thank you very much.