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May 20, 2016

Reshoring Millions of Jobs Back To The U.S.? Here’s Why Trump and Clinton Can’t

One of the big themes in the current presidential race is how decades of free trade have dealt a heavy blow to the American worker as millions of jobs were shipped overseas to take advantage of cheap labor.
That’s even turned some pro free-trade Republicans into protectionists. As a result, the candidates are promising to bring these jobs back to the U.S. – whether by lowering taxes (Donald Trump), improving skills (Hillary Clinton) or building infrastructure (Bernie Sanders).
But can all these manufacturing, service and knowledge-intensive jobs that were outsourced or offshored to China, India and other places really be “brought back,” as the candidates seem to believe?
In short, no. Our own research suggests that many of those jobs are pretty much gone for good. And it has a lot to do with how the global economy works. Instead of hoping that firms eventually bring jobs back, the focus should be on developing a new type of worker with a skill set that takes advantage of the needs and reality of our increasingly globalized and networked economy.

History of offshoring

Offshoring of manufacturing took off in the 1980s, followed by offshoring of business services and knowledge work in the 1990s and 2000s.
Labor-cost advantages, increasing availability of qualified personnel abroad and advanced information and communication technology have made it attractive to create more jobs abroad rather than at home. Free trade agreements and the collapse of the Iron Curtain have also played a huge role. For example, estimates suggest that since 2001, 3.2 million jobs have been offshored from the U.S. to China alone.
Especially larger businesses in the U.S. and Western Europe have shifted a large proportion of their operations – from manufacturing to call centers, tech support, accounting and even innovation – to emerging economies where labor is still a fraction of the cost at home. In business services, for example, initial labor cost savings are reported to average between 20 percent and 40 percent.
Ten years ago, this trend led many U.S. economists, including Princeton’s Alan Blinder, to fear the loss of millions of jobs, in particular in technology and services, to developing countries. Maybe they were right about that. But is the trend reversible?

Reason for hope?

The presidential candidates aren’t the only ones who think it is.
The so-called “Reshoring Initiative,” launched in 2010 by entrepreneur and manufacturing expert Harry Moser, aims to encourage American companies to do just that: “reshore” jobs that were offshored – specifically in manufacturing.
And it claims the tide is already turning. About 67,000 manufacturing jobs were added in the U.S. in 2015, compared with only 12,000 in 2003, according to the Reshoring Initiative. Of course this is only half of the story, as companies also continue to create new jobs outside the U.S. For example, while Apple recently moved up to 2,000 jobs back to Arizona, it will keep investing “as aggressive as ever” in China.
But still: reshoring appears to be happening. And why? According to the Reshoring Initiative, wages in emerging economies are rising, which reduces cost advantages of going abroad. Plus many U.S. businesses are increasingly caught by serious offshoring challenges. Often, so-called hidden costs add up, such as unexpected quality problems and delays, language difficulties and coordination costs. For example, having encountered substantial delays and language issues with its Indian offshore tech support centers, Dell Inc. decided in 2003 to bring these activities back to the U.S..
If more companies took account of those hidden costs, the group argues, a vast number of jobs could be brought back.

Companies are global

But here’s where the argument runs aground.
While it’s true that many companies do encounter hidden costs when they ship jobs abroad, reshoring has been only one, rather rare response companies have used to mitigate them.
Instead, we find in our own studies that many businesses take those hidden costs as an opportunity to learn and develop more effective global coordination structures and capabilities that ultimately reduce them and make the companies more nimble as a result.
For example, several U.S. tech companies offshored tech support to Egypt in the 2000s. When the Internet broke down during the Arab Spring in 2008, these companies experienced serious delays. Clearly this was an unforeseen cost that could seriously hurt the bottom line by worsening customer service and leading to defections to rival businesses. But rather than reacting by reshoring those jobs in the U.S., where such a problem wouldn’t have occurred, these companies invested heavily in cloud technologies and other infrastructures that now allow them to swiftly move operations to other locations in case of disruptions.
In other words, companies like these doubled down on their global footprint while reducing their dependence on any one location, whether it is Egypt or the U.S., thus increasing their flexibility to deal with unexpected problems. This makes it even less likely they’ll bring those jobs home.

Global mindset

And this global mindset means U.S. locations have become less central for the operations of U.S.-based companies. In fact, companies from Cisco to Google now operate multiple global centers with rotating and flexible workforces.
Global outsourcing service providers, such as Accenture, IBM Global Services and Infosys, have been at the forefront of this development. In our recent study, we found that these firms have established global networks of operations that not only give them access to talent pools around the world but allow them to process client requests 24/7 by shifting work overnight to operations in a different time zone.
On top of that, face-to-face communication – both inside the firm and with external clients – is needed less and less thanks to advanced communication technology. For example, many firms today use videoconferencing tools such as telepresence, which creates virtual meeting rooms with multiple participants who, in reality, sit in offices around the world.

Jobs of the future

So what does this all mean for the U.S. and claims that a future president could bring these jobs back?
First, it’s best to accept that most jobs that were once offshored are gone and instead focus energies on preparing the workforce to get ready for the new global economy and take advantage of the jobs that will be up for grabs in the coming years. For example, significant technological advancements in robotics and 3D printing will clearly offer rich opportunities for domestic manufacturing and job growth.
Yet, to reap such opportunities, education and training are key – though in a different way than most people think. In today’s economy, generic STEM skills – in science, technology, engineering and math – can be easily replaced in emerging economies thanks to the increasing standardization of knowledge work and tech jobs around the world. What is needed instead is a more unique blend of qualifications combining local and global expertise, technical and interpersonal skills.
Certainly, U.S. workers need to be technically trained at the highest standard. But this is not enough as emerging economies are catching up fast. Thanks to population growth and improving education, India and China produce more than 10 times as many science and engineering graduates as the U.S. That is why U.S. workers also need to be equipped with strong interpersonal and leadership skills as well as local expertise to remain competitive.
More specifically, they need to learn to work in international and intercultural teams, lead local and remote staff, and become intimately familiar with both local and global client needs and supplier expectations, so they cannot be so easily replaced.
Therefore, old recipes, such as lowering corporate taxes, investing in infrastructure and technical training, will barely help the U.S. bring back old jobs. Nor will “building new walls” make the U.S. less dependent on foreign talent pools and expertise.
The focus instead needs to be on preparing a U.S. workforce for an economy that is increasingly globally connected.
The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.
Courtesy of The Conversation
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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