by Karl P. Sauvant

The author is the Director of UNCTAD's Investment Division and the leader of the World Investment Report team.

With feelings running high today over the number of service jobs moving out of the US and Western Europe, the similarly fierce debates of the late 1960s and 1970s about the relocation of manufacturing jobs come back to mind. Then, worries in the US about job growth were combined with concerns over the widening trade deficit and the apparent decline in American competitiveness. This was exemplified by rising imports of cars and machinery – first from Europe and then from Japan – and the falling share of the US in world exports of manufactured products. In the 1980s, concerns shifted to the perceived threat from Japanese companies to the US semiconductor industry.

Whenever such fears have surfaced, they have provoked calls for protectionism. Import restrictions are frequently suggested, as well as actions to discourage firms from investing abroad. And proposals are made to provide subsidies for domestic employment.

Now, with the benefit of hindsight, we can see that, at least in those earlier decades, the fears were overstated. The absolute number of manufacturing jobs fell only marginally between 1985 and 2000 in the US and much less so than in countries like Germany and Japan. In the export arena, the US share at the end of the 1990s was similar to that of the early 1970s, despite the growth of other countries’ manufacturing capabilities. US real per capita output, despite the supposed loss of high-wage jobs, has remained steady, at 35%-to-45% above EU levels. The United States managed to absorb competitive threats without losing ground to its main competitors in terms of per capita output. The wage system continues to reward high skills with a larger premium than in most other developed countries.

How did the US adjust? Responses to foreign competition took various forms. Some foreign firms, for example in the automobile and semiconductor sectors, expanded in the US. In manufacturing, while employment in parent companies of US transnational corporations fell by two million between 1977 and 1990, 75% of the decline was offset by the growth of foreign-owned manufacturing operations in the country. A further decline of 600,000 jobs in parent firms in the 1990s was almost entirely compensated by the growth of foreign firms’ operations in the US. Exchange-rate changes also helped the adjustment process by reversing some losses of competitiveness for the economy as a whole.

The recent growth in the offshoring of business services has revived similar fears, even though US imports of business services are negligible relative to the total sales of such services. One possible reason for the strong reaction is that the offshoring trend coincides with the collapse of the information technology boom. Another is that a good part of imports are coming from India, a developing country with low wage levels and a large educated population. A third is that these are by definition labour-intensive industries, in which the “relocation of jobs” is more obvious than in manufactures. Finally, offshoring particularly affects white collar workers – and they are generally a more vocal group than their blue-collar counterparts. It also raises the fear that it is siphoning off the higher-level jobs that high-wage countries are supposed to be moving into.

In economic terms, the offshoring of services is no different from that of manufacturing. The main driver in both cases is the search for improved competitiveness. The enabling factors are technological change and the liberalization of trade and investment, making it possible to relocate processes or functions economically. And the main determinant of location is the availability of competitive sites (which is in turn dependent on infrastructure, skills and a good investment climate).

In services, the rapid fall in communication costs, along with greater bandwidth, has increased the tradeability of services and allowed for a new international division of labour in a whole range of service products. This is precisely the process we have seen for some time in the manufacturing sector. It allows countries – developed and developing (in fact, most service offshoring takes place among developed countries) – to realize their latent competitive advantages. As these countries build new skills and capabilities and specialize, their comparative advantages also evolve, and they encroach more on the former comparative advantages of other countries, forcing the latter to adapt by innovating or by shifting the composition of their production.

If the past experience of manufacturing is any guide, domestic producers of related service activities will adapt by shifting their specializations to higher-skilled segments of their industries or to entirely new industries. Just as the fears raised in previous periods of international restructuring proved exaggerated, the present ones are also likely to be unfounded. The final outcome should again be a win-win situation for parties at both ends of the process. Of course, there may be a need for adjustment policies to assist those workers most immediately affected in a transition period. But protectionism is not the answer. It would damage the competitiveness of firms and only strengthen the critics of globalization, who argue that rich countries support globalization only when they reap immediate gains.