Tuesday, April 25, 2006

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The Labor Department (sort of) concedes the obvious on offshoring

I've debated a lot of people on the whole offshore outsourcing issue, and regardless of the position one takes, there has been unanimity on one subject: if the Labor Department provides Trade Adjustment Assistance to manufacturing workers displaced by trade, the program should be extended to include service-sector workers affected by offshore outsourcing.

According to this Paul McDougall story in Information Week, it appears that the Department of Labor has finally recognized this fact as well:

The federal government appears to have reversed a long standing policy that prevented thousands of "outsourced" computer programmers from collecting the same employment benefits routinely extended to factory workers who've seen their jobs disappear amid a flood of cheap, manufactured imports.

In a turnabout from earlier decisions, the Department of Labor—in a note published this month in the Federal Register—said that four employees of IT services vendor Computer Sciences Corp. that were laid off in 2003 from a facility in East Hartford, Conn., are eligible to apply for benefits under the Trade Adjustment Act. The act provides a number of relief measures for workers who've lost their jobs to cut-rate foreign competition, including extended unemployment payments, federally funded retraining, and relocation allowances.

The department has long held that programmers who've lost jobs to cheaper, foreign workers aren't eligible for the TAA program because their employers, or employer's customers, are not importing a physical good in the same way as, say, steel manufacturers. A number of federal and state lawmakers have introduced bills that would automatically grant eligibility under the act to IT workers and other white collar professionals, but none has become law.

The labor department initially said that although CSC moved production of its Vantage-One insurance software from East Hartford to CSC India, the software was not an imported "article" as defined by the act. In a lawsuit, the workers asked the U.S. Court of International Trade to overturn the department's ruling. In January, trade court judge Nicholas Tsoucalas ordered the department to revisit the case, noting that, "Labor's interpretation of the law, that software code must be embodied on a physical medium to be an article under the Trade Act, is arbitrary and capricious."

In a Federal Register note published April 11, the Labor Department conceded the point and ruled that the four CSC workers would be eligible to apply for TAA assistance. In ruling, the department said it would henceforth look upon software, whether shipped into the U.S. on a disc or transmitted into the country via telecommunications networks, as a physical product.

"Software and similar intangible goods that would have been considered articles for the purposes of the Trade Act if embodied in a physical medium will now be considered articles regardless of their method of transfer," the department wrote.

Here's a link to the notice in the Federal Register. The notice suggests the effect of the ruling is still limited:
The Department stresses that it will continue to implement the
longstanding precedent that firms must produce an article to be certified under the Act. This determination is not altered by the fact the provision of a service may result in the incidental creation of an article. For example, accountants provide services for the purposes of the Act even though, in the course of providing those services, they may generate audit reports or similar financial documents that might be articles on the Harmonized Tariff Schedule of the United States. Because the new policy may have ramifications beyond this case of which the Department is not fully cognizant, the new policy will be further developed in rulemaking.

posted by Dan on 04.25.06 at 09:15 AM


Professor Drezner seems to have forgotten to actually ask a question for this one.

But if nothing else I'd like to make sure there is clarity on terminology:

"Outsourcing" typically refers to the services sector and thus relates to the kinds of jobs that leave the US for places like India.

"Offshoring" typically refers to the manufacturing sector and relates to those jobs that first went to Mexico when NAFTA started but now end up in China -- or in the case of the apparel industry, moves every six months or so, screwing everyone except the final consumer of cheap shirts and khakis. (Would appreciate TN's take on this last bit, since I know he worked in that industry once.)

Would love to hear if anyone has better definitions, since these words will increasingly be part of our lives. "Offshoring" still doesn't come up at dictionary.com.

posted by: St. James the Lesser on 04.25.06 at 09:15 AM [permalink]

As one software developer who has been outsourced and who was turned down for TAA, all I can say is, "It's about fricking time!" This comes far too late to help tens of thousands of us.

My understanding is that the cost of TAA-blessed benefits is paid by the former employers, which adds to the cost of outsourcing. One of the problems of many economic decisions is that the non-monetary costs are rarely included in decision-making. While this helps balance the books, the economic effect of lost purchasing power is still something that outsourcing employers are free to ignore.

posted by: diane on 04.25.06 at 09:15 AM [permalink]

Only 3 or 4 years too late.

At least the bureaucrats have secure jobs.

posted by: save_the_rustbelt on 04.25.06 at 09:15 AM [permalink]

If we offer TAA assistance to anyone, we should offer it to everyone. Honestly, we should offer it to anyone who loses their jobs to any kind of economic trend, if we should offer it to anyone. Still, if they're going to limit it to trade, then continuing to refuse it to the minority who cannot claim any fiction to make themselves "manufacturing" workers, then it seems totally arbitrary. I guess it's the best that they can do and keep to the Chevron guidelines for federal agency flexibility in legislation interpretation.

I recognise that in practical terms this is a positive move and that I'm letting the perfect be the enemy of the good in not supporting it, but I find it tough to see the TAA becoming even more ridiculous as a great thing.

posted by: James of England on 04.25.06 at 09:15 AM [permalink]

St James - Offshoring as you define it is simply globalisation of product sourcing which has occured with growing velocity in the post-WW2 years, mostly since the advent of containerised shipping in the 60s. Obviously, there was manufacturing offshoring before then, but not so much in the post-war era. The entrenched thought is embodied in the Product Life Cycle Theory - still conventional wisdom today but flawed as the global mobility of intellectual assets enables the design, etc of products outside of proximity of the main end user markets.

A key clarification here should be services offshoring. Offshoring is not necessarily outsourcing since many multinationals have captive BPOs (business process outsourcing) units in India, Philippines, and other emerging markets. However, much of the offshoring activity is outsourcing.

So, I guess the good professor is accurate in his usage of the word offshoring over outsourcing. Sorry.

With specific regard to TAA assistance for offshored jobs - I have to support it. The biggest problem with the US workforce today is that many folks are making a living off skills acquired during study for an undergrad degree done in the 70s, 80s, or 90s without skills refreshers. If the workforce doesn't refresh skills, then they can only expect to be replaced by more educated people in the developing world (although it's a big ego blow to many in the US to think that the developing world has a lot of people who are smarter and/or more capable than them). My point is that the TAA assistance will help with much needed skills improvement which many Americans need and should have acquired before the value of someone in the developing world exceeded their own.

posted by: TN on 04.25.06 at 09:15 AM [permalink]

1. The FR link doesn't work (but I found the notice).

2. GAO defined offshoring (in the first of a series of reports on offshoring) thusly:
The term “offshoring” is sometimes used synonymously with the term
“outsourcing.” However, outsourcing means acquiring services from an
outside (unaffiliated) company, which can be either another domestic
company or an offshore supplier. In contrast, a company can source
offshore services from either an unaffiliated foreign company (offshore
outsourcing) or by investing in a foreign affiliate (offshore in-house
sourcing). In the latter case, the services supplied by the company’s foreign
affiliate would not be considered outsourcing since the company has an
ownership stake in both the U.S. and foreign operations. For the full definition and a Venn diagram of business transactions that are involved, see Appendix II, GAO-04-932 at www.gao.gov.

posted by: JK on 04.25.06 at 09:15 AM [permalink]

I used to be a big proponent of outsourcing myself, in the sense of the back office, computer programming, call center outsourcing going to India. I was after all raised on the sorts of economic analyses that suggested it was a net plus for the outsourcer, allowing a greater focus on higher-level design and creative enterprises, being offset by insourcing and the whole 9 yards. I've changed my mind in a big way.

What's done it for me has been some site visits to American universities over the past year and a half, technical colleges, public universities and other traditional big feeders for the US engineering and computer software industries. The number of bright kids majoring in engineering and other such techie fields, already low, has been plummeting to rock-bottom. I spoke to some of the students who'd switched out of e.g. EE or CS, and a very common theme was that they didn't consider an engineering major to be a smart investment. It's an incredibly hard major, lots and lots of hard work over at least 6 years of post-secondary ed, educational loans up the wazoo, IOW a massive investment of both time *and* money with big-time indebtedness to finance it. It's no wonder that smart kids aren't going into engineering or computer fields anymore, there's just too much sunken into it with too little prospect for compensation afterward.

You can argue with the kids all you want about how "most engineers do fine" and "don't worry, you probably won't be getting outsourced," and I'm sorry, but in the calculations these kids make about their future, such majors are high risk, lots of work and little reward. They've encountered too many cases of other smart people like themselves busting their tails for many, many years only to be "dispatched" as expendable when a supposedly cheaper alternative comes in. I don't think the students are looking for absolute guarantees, nobody expects that, but they do want to have some reasonable expectations of reward for their educational efforts. If you're going to make people sweat so hard and take on so much educational debt, you really have to give them a lot more job security and assurance than the outsourcing trend is allowing.

We are killing ourselves here, this is one of those "hidden" but very real costs of outsourcing that doesn't easily show up in the immediate calculations, but that's hitting us hard as a nation. The US cannot function as a first-world powerhouse, let alone a superpower, if we gut our technical fields from the inside. Don't for a moment pretend that we could make up the losses with H-1 visas, either-- people from outside the US now have major opportunities back in their own home countries (where of course they have cultural and familial as well as economic and educational connections), which were not there before, so they're coming here, getting the training and experience, and then returning home. Remember, too, that if we so aggressively farm out our programming and other basic computer industries, then potential creative minds of tomorrow won't get the grunt-level, entry experience that we all have to have to do the more interesting work later.

posted by: Ramblin' Man on 04.25.06 at 09:15 AM [permalink]

Ramblin' Man, the cost you're talking about isn't a cost of reality, it's a cost of union propaganda. In reality a negligable number of jobs (3.something million over the next 15 years? Something like that) are being lost. The cost you're talking about is the cost of having a media that delight in "giant sucking sound" type stories. It's a cost of having a first amendment that doesn't just protect relatively harmless nazis wandering through Skokie, but also protects Lou Dobbs.

posted by: James of England on 04.25.06 at 09:15 AM [permalink]

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