The Muddles over Outsourcing

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(with Jagdish Bhagwati and T. N. Srinivasan--forthcoming in the Journal of Economic Perspectives) Critics have muddled the public debate over outsourcing by using the term interchangeably to refer to altogether different phenomena such as on-line purchase of services, direct foreign investment and, sometimes, all imports. We define outsourcing explicitly as the services trade at arm's length (the so-called Mode 1 services in the WTO terminology), conducted principally via the electronic mediums such as the telephone, fax and Internet.  Under this definition, the total number of the U.S. jobs outsourced annually is minuscule and is expected to remain so over the next decade, even on a gross basis (i.e., without adjusting for the jobs in-sourced from the U.S.). The fears that offshore outsourcing will lead to high-value jobs being replaced by low-value jobs down the road are also argued here to be implausible in view of several qualitative arguments to the contrary. We also demonstrate that offshore outsourcing of Mode 1 services raises no new analytical issues, contrary to what many fear.  Thus, it leads to gains from trade (with the standard caveats applicable to conventional trade in goods) and, in specific cases, to income-distribution effects.