Stuart Anderson, National Foundation for American Policy
July 2, 2004
Dubious assault on 'outsourcing'
Posturing state lawmakers need to read up on law - starting with Constitution
California legislators trying to stop the perceived threat of "outsourcing" want to block state contract work from being done overseas and add new commercial restrictions cloaked as "privacy" protections. The problem is that instead of pursuing positive measures to create jobs, these proposed measures would violate the U.S. Constitution, risk trade retaliation and increase budget costs.
A bill (AB 1829) by Assemblywoman Carol Liu, D-Pasadena, would prohibit state contract work from being performed outside the U.S. By limiting competition for state contract work, the measure would increase procurement costs, as happened when New Jersey spent almost $1 million extra to bring 12 call center jobs back to the state. Equally worrisome, a legal analysis done for the National Foundation for American Policy concluded such state 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. This is particularly true when trade retaliation from foreign countries could occur, which is likely when states try to put up barriers to foreign suppliers of goods or services. For example, the U.S., 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.
This basic concern didn't stop the Assembly from passing Liu's bill, unfortunately. A Senate committee has followed suit.
Another area of attack on outsourcing is Sen. Liz Figueroa's attempt (SB 1451) to prevent California residents' consumer information from being processed outside the U.S. Considering that Figueroa, a Fremont Democrat, is a sponsor of several anti-outsourcing measures, one can be skeptical that privacy is her main concern. But as the foundation's analysis documented, several existing federal laws allow sharing of consumer information without regard to geography. They also provide for recourse against U.S. corporations that don't do enough to guard consumer information.
The market already provides great incentive for a foreign company to take great care in protecting private consumer information, since failure to do so would likely end that firm's chance of gaining any future contracts, jeopardizing the company's very existence. If additional safeguards are needed the best approach would be to engage in multilateral negotiations with several countries to adopt a common privacy standard or work with other nations to strengthen their laws. Either tactic would be better than adopting a unilateral approach designed to erect trade barriers, not protect consumers.
Concerns about outsourcing overseas as a source of job loss have been overstated in the media. A recent federal labor report indicates that in only 2 percent of recent layoffs of 50 or more people was offshore outsourcing even a factor. What is being called "outsourcing" today is, in fact, anything that can be considered imports of services. The fact that consumers, taxpayers and businesses are getting more value at less cost is positive. While it is understandable 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 California. The wrong approach is to implement measures that would restrict trade, invite retaliation or violate the U.S. Constitution. The right way is for state legislators to adopt positive measures to create jobs, including lowering the tax, regulatory and litigation burden on employers. The governor's recent worker's compensation overhaul is the type of positive reform that encourages employers to stay and grow their businesses in California.
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.