The truth about offshoring

By Gérard Bérubé

In January 2005, the World Trade Organization (WTO) eliminates the remaining quotas protecting the textile industry. With that, the last barriers shielding the textile and garment industries in industrialized economies against unbridled competition from developing countries will be dismantled.

The dreaded exodus of garment jobs, even more vulnerable than textile jobs, to competition from low-wage countries is likely to rekindle the offshoring controversy raised this year, but all too often in a self-serving way. Beyond the political or union interests it served, offshore outsourcing has still not caused the much-denounced hemorrhage.

Yes, offshoring is a reality and it is changing the shape of the world. It was not just one of the issues of the US electoral campaign, piggybacking on an economy still struggling to create enough jobs. It is well under way and may grow by leaps and bounds now that India, the global office, has followed in the footsteps of China, the global workshop. Last year, the trend spilled over from these sectors to the service industry, a major sector of economic activity hitherto considered immune to globalization.

The trend has spread from manufactured goods to call centres, information technol-ogies, certain  accounting and financial services, and even to journalistic coverage. Financial information agency Reuters this year announced plans to hire, by mid-’05, some 40 jour-nalists who would be assigned to monitor US companies from Bangalore, India.

It seems the account-ing profession may not be spared. In last month’s issue of CAmagazine, the feature “Bombay bound” recalled that after IT and HR, it’s finance’s turn to be outsourced to emerging countries. The feature referred to a study published by US market intelligence firm IDC saying that the “global finance and accounting outsourc- ing market should grow 9.6% over the next five years to reach US$47.6 billion in 2008.” Most businesses are believed to outsource these services particularly to India and Eastern Europe.

The range of “relocatable” jobs has widened, with new regions jumping into the act. Places such as Vietnam, the Philippines and North Africa have joined India, China and Eastern Europe.

Industrialized countries  such as France, Germany and the US have been denouncing offshoring without offering an alternative to the allure of countries with low operating costs. At most, they have bran-dished the threat of protectionist measures, without going further, because such measures are circumscribed within the framework of the WTO.

But complaints aside, has the trend delivered the anticipated negative impact? Observers frequently present off-shoring as a natural consequence of globalization. In fact, this phenomenon is not new; it is an offshoot of the globalization trend started more than 20 years ago. It has enabled many of yesterday’s poorest econ-omies to grow or become full-fledged members of the global economy.

An UNCTAD (member organization of the UN) report tabled in September focused on the added value and benefits of the division of labour for both host and home countries. Countries that export work can focus on improved competitiveness and higher value-added activities, says the organization. What’s more, this competition forces many industrialized economies to lower their tax burden, streamline bureaucracies and provide incentives or drivers.

As for the magnitude of the trend, US-based Forrester Research has estimated that at the end of 2003, offshored US jobs accounted for less than 1% in all affected sectors. According to the firm’s projections, the percentage should rise to 1.6% by 2015. This could hardly be called a hemorrhage. As for investments, UNCTAD said that in 2001 (latest available fig-ures), offshoring-related invest- ments accounted for only 4% of transborder investments, i.e. US$32 billion of a total of US$720 billion.

Lastly, the UN organization pointed out that the benefits of offshoring are not restricted to developing countries. Industrialized countries are also playing the role of host. “Most of the offshoring takes place between developed countries and the most popular destinations are Ireland, Canada and Israel,” says the study’s author, who claims the trend is still a North-North reality. As a case in point, he said that in 2002-2003, more than half call-centre offshoring projects were slated for developed countries.

The trend is real and could even get bigger. But whether it is significant and what it really means, only time will tell.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal