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Foreign Outsourcing: Economic Implications and Policy Responses

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Topic: Economic Policy

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Content Inside: Congressional Research Service The Library of Congress CRS Report for Congress Received through the CRS Web Order Code RL32484 Foreign Outsourcing: Economic Implications and Policy Responses Updated June 21 2005 Craig K. Elwell Specialist in Macroeconomics Government and Finance Division Foreign Outsourcing: Economic Implications and Policy Responses Summary Foreignoutsourcing--theimporting ofsomeintermediateproduct (i.e.aportion of a final product or some good or service needed to produce a final product) that was once produced domestically--is not a new phenomenon nor is it one that is economically distinct from other types of imports in terms of its basic economic consequences. A steadily rising level of trade in intermediate products is one of the salient characteristics of U.S. trade and world trade for the last 30 years. It has been estimated that as much as a third of the growth of world trade since 1970 has been the result of such outsourcing worldwide. While foreign outsourcing may seem different from traditional notions of trade inthat it involves exchangeof a productive resource (capital or labor) rather than an exchange of a final good and service the ultimate economic outcome is exactlythe same: a net increase in economic efficiency through the elimination of economic inefficiencies that occur when countries use only the productive resources found within their borders. This gain is not likely to be achieved however without causing costly disruptions for the particular workers and sectors tied to the now-imported good. Foreign outsourcing trade in general and trade deficits tend to change the composition of total output and the composition of total employment but it is unlikely that economy-wide they lead to any change in the overall level of either. In some areas of the economy output falls and jobs are destroyed but in other areas output is increased and jobs are created. There are two complementary reasons for this. First the Federal ...

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