Aug. 11, 2004
Ban on outsourcing ignores Constitution
Some New Jersey legislators want to stop the perceived threat of "outsourcing" by blocking state contract work from being performed overseas. Instead of pursuing positive measures to create jobs, these lawmakers have endorsed a plan that would violate the U.S. Constitution, risk trade retaliation, increase budget costs and perhaps even foster corruption.
A bill co-sponsored by Sen. Shirley Turner (D-Mercer) and Sen. Joseph Coniglio (D-Bergen) would require that all services under state contracts or subcontracts be performed within the United States. The bill (S 494) passed the Senate, 29-5, in June and now awaits Assembly action. In the meantime, policy-makers should consider a host of serious constitutional, international and fiscal issues.
First, on the most practical level, by limiting competition for state contract work the measure would increase procurement costs. We saw this happen after a contractor established a call center in India for New Jersey welfare and food stamp recipients in 2002. Criticism erupted the following year, and in response, the state negotiated a deal with the contractor to move the call center back to the United States. As a result, New Jersey taxpayers paid, on top of the original contract costs, an additional $886,000 for 12 jobs. "Saving" 1,400 such jobs in the future would cost the state an extra $100 million a year.
Second, the bill is likely to be found unconstitutional. A legal analysis for the National Foundation for American Policy performed by Shannon Klinger and Lynn Sykes, attorneys with Alston & Bird, concluded that such state contract bans "are legally suspect ... since courts would likely find that such measures improperly intrude on the federal foreign affairs power and violate the U.S. Constitution's foreign commerce clause."
Simply put, states are not allowed to make their own trade or foreign policies. And New Jersey legislators already should be aware of this issue. Last year, the Assembly State Government Committee let die a bill to restrict U.S. companies' use of call centers in foreign countries. This happened because committee members expressed concerns that the bill in its original form raised constitutional questions, since it appeared to allow the state of New Jersey to regulate commerce on behalf of the entire nation.
Third, these constitutional concerns are of particular importance when state actions are likely to violate America's international trade obligations and thereby increase the likelihood of trade retaliation from foreign countries. The United States, along with more than 30 other nations, has signed the Government Procurement Agreement, which prohibits state and federal procurement policies from discriminating on the basis of where work would be performed.
Fourth, corruption is a concern not previously raised in the outsourcing debate but one that should be considered. A ban on overseas contracts has the potential to evolve into preferences for in-state contractors, increasing the likelihood that a state will see sweetheart deals for procurement contracts rather than robust bidding.
Concerns about outsourcing overseas as a source of job loss have been overstated in the media. A recent report from the Bureau of Labor Statistics indicates that in only 2 percent of recent layoffs of 50 or more people was offshore outsourcing even a factor. While it is understandable that Americans are anxious about jobs, there is no evidence that trade protection saves jobs.
There is a right way and a wrong way to expand economic opportunity in New Jersey. The wrong approach is to implement measures that would restrict trade, invite retaliation or violate the U.S. Constitution. The right way is for New Jersey legislators to adopt positive measures to create jobs, including lowering the tax, regulatory and litigation burden on employers. The outsourcing debate pits feel-good measures with harmful consequences against sound reforms aimed at creating jobs by lowering employment costs. History has taught us which approach works best.
Stuart Anderson is Executive Director of the National Foundation for American Policy, an Arlington, Va.-based public policy research organization.