Outsourcing tide is not likely to turn

Published on Author Joshua Benjamin

With the western economies beginning to rebound, there is a wave of opinion that outsourcing trends will turn back to “insourcing” back in the west.  In President Obama’s inauguration speech, he referenced the need to bring back jobs to our shores.  There are three main arguments that supporters of the trend are citing.  First, China currently has rising labor costs while paired with a declining labor force.  The shale gas boom in the US could provide a energy competitive advantage for companies to keep jobs in the US than have the extra energy costs abroad.  The main reason though is that companies are seeing their relationships with foreign countries for their production needs as “convoluted and insecure.”

Although companies such as GE, Apple, and Lenovo have announced intentions of bringing labor back to the US, there are still definite benefits to outsourcing.  The labor costs in China, although rising, are still roughly 25 times less per hour than US workers.  If China does become competitive in its costs, there are plenty of other viable options in Asia to outsource and keep costs really low as other countries began to develop mass-manufacturing economies.  There currently is no evidence to show a large trend of companies insourcing when in fact a study by the US Business and Industrial Council shows the opposite with manufacturing imports at record highs.


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One Response to Outsourcing tide is not likely to turn

  1. Think of opportunity costs: lower wages offset by higher logistics costs and higher management costs and lower productivity plus (depending on what is being outsourced) time delays. There are risks, too, as noted. Cheap labor alone is not enough, and so even a modest shift in relative wages and other costs can change the balance.

    But energy may not be key. The US is part of a global energy market, and so prices here are linked to prices overseas. Shale oil may increase local supplies, but if it doesn’t shift global supplies, then it will not make any difference. [Ceteris paribus unchanged demand.]