Offshoring—Good or Bad

Offshoring, without a doubt, when used in moderation can be a benefit to the economies of both the mother and host countries, but offshoring per se is neither a boon nor a bane.

Offshoring is a type of foreign investment. But all foreign investment is not the same. One type can be defined as a company’s investing is a foreign land to produce products and service to be sold in the foreign economy. An example of this is the building of automobile factories in the U.S. by Japanese firms that build cars for sale here in America. Such foreign investment can be a boon to both countries. The economy of the host country is grown by the wages paid for the production and the mother country’s economy is grown by the profits returned from the sale of the cars. This kind of foreign investment also generates what is known as a multiplier effect that boosts the host country’s economy too, because such factories bring into play maintenance, transportation, and retail firms, all of which also employ people and generate profits.

Another kind of foreign investment occurs, however, when the foreign companies’ investment is made to make products and services to be sold not in the host country but in the mother country. Most American business offshoring is made with this kind of foreign investment, and when carried to the extreme, is a benefit to neither the mother nor host country. It reduces labor in the mother country and only has minimal benefit to the host country, because although it provides jobs, it doesn’t generate any multiplier effects. This is why the economies of the countries in Latin America which have been producing products for sale in the American market for many decades have not been benefited greatly by the practice.

When carried to the extreme, which American business now seems to be doing, the effects are disastrous. By proliferating this kind of offshoring, the economies of many foreign nations are entirely dependent on the American economy. Since these foreign nations make products primarily for sale here, if the American economy tumbles and the products can’t be sold, the economies of these foreign countries will tumble too, and a world-wide depression could result. That is the danger the world now faces.

Broadly speaking, this is the problem: foreigners produce what Americans consume and lend us the money to buy them. As Stephen Roach, the chief global economist at Morgan Stanley, put it: "We outsource everything except consumption." But consumption can not be maintained under these circumstances.

Of course, there is also a moral argument against such offshoring. Traditional colonialism pretty much came to an end after the Second World War. But the conditions described above for offshroring are almost identical to the practices of the British East India Company which colonized the Indian subcontinent. It is a system that exploits the poor, downtrodden, and underdeveloped.

So being both immoral and counterproductive when carried to extremes, it can also be view as traitorous. For it can destroy this nation more easily then al-Qaida or foreign agents can.