The Current State of Canadian Research and Scholarship on the United States Fulbright-C

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Pierre Martin, Université de Montréal Services
Offshoring The Rise of China and Asia, and its
Effects on North America Presentation at the
CÉRIUMs Summer School China Risen How it
changes and changes us
2
Services Offshoring The Rise of China and
Asia, and its Effects on North America
China Risen Summer School of the Université de
MontréalsCentre of International Studies
(CÉRIUM), July 5, 2006

• Pierre Martin
• Associate Professor of Political Science
• Director of the Chair in American Political and
  Economic Studies (CÉPÉA)
• Centre of International Studies (CÉRIUM)
• Université de Montréal

www.cepea.umontreal.ca
3
Five questions on services offshoring

• 1. What is offshoring it and what is the problem?
  
• 2. Services Offshoring in China What is going
  on?
• 3. What impact on jobs in North America?
• 4. How is the United States reacting?
• 5. What impact on Canada and Québec?

4
What is offshoring andwhat is the problem?
5
What is offshoring? A simple illustration
Source USGAO 04-932, p. 58.
6
What is the problem?

• Americans no longer are afraid of globalization
  and free trade

but perception is different when it comes to
offshore outsourcing
Source Chicago Council on Foreign Relations,
Global Views 2004, pp. 40 42.
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2. Services Offshoring in ChinaWhat is going on?
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Western concerns aboutChina and services
offshoring

• 1. The bottomless pool of labor
•  In China, when youre one in a million, there
  are a thousand others just like you.  (Thomas
  Friedman, The World is Flat)
• 2. A repeat of the Chinese manufacturing export
  dominance in the area of tradable services

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China as an offshore service location strengths
and weaknesses

• Strength Labor costs
• Weaknesses
• Business environment
• High political risk
• Poor intellectual property protection
• Low cultural adaptability
• Services underdeveloped

10
Is the pool of qualifiedservice workers
unlimited?

• 2005 3.1 million university graduates, of which
  600,000 new engineers
• USA 1.3 million graduates 70,000 engineers
• Cost of a Chinese engineer 19 of its US
  counterpart (India 12 Canada 84)
• Will North American engineers be swept away?
• Not so sure, says a McKinsey study

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The labor pool in China and India seems
unlimited
Potential numbers in theory thousands Potential numbers in theory thousands
China India
Engineers 1,589 528
Finance/Accounting 945 2,273
Natural scientists 543 674
Analysts 202 537
Generalists 1,733 6,181
Support staff 97,506 92,635
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but appearances can be misleading
Potential numbers in theory thousands Potential numbers in theory thousands Numbers employable by MNCs, thousands Numbers employable by MNCs, thousands
China India China India
Engineers 1,589 528 159 132
Finance/Accounting 945 2,273 142 341
Natural scientists 543 674 54 101
Analysts 202 537 252 371
Generalists 1,733 6,181 120 828
Support staff 97,506 92,635 4,875 4,632
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Where to go offshore? It depends on the MNCs
priorities
Canada Chine Inde
Costs (on 4) 1.10 3.21 3.47
Talents and availability (on 3) 2.40 1.17 2.26
Business environnement (on 3 ) 2.03 1.76 1.14
Total (on 10) 5.52 6.14 6.87
Source A.T. Kearneys Offshore Location
Attractiveness Index, 2005.
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Services account for a small proportion of the
Chinese Economy (data World Bank 2003 GDP)
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Summary observationson services offshoring in
China

• In China, the supply of employable labor is not
  unlimited as it did in India, rising demand is
  likely to lead to increases in labor costs for
  the top talent
• In spite of the large pool of Chinese university
  graduates, employable talent in the services is
  not easy to find
• Business environment in China, notably the lack
  of protection of intellectual property, is a weak
  point
• Growth in the services sector is more likely to
  occur as a result of increased domestic demand
  for services than demand for traded services

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3. What impact on jobs inNorth America?
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What impact on Jobs?
Affected Jobs (OECD)
Insourcing
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Employment in affected occupations
Canada Québec
Secretaries 271,100 97,335
Accounting support staff 178,300 64,460
Accountants 171,300 39,325
Client services staff 164,800 37,755
Sales 140,900 29,215
Administrative agents 151,400 22,550
Engineers 109,300 22,325
Authors calculations from OECD estimates and
Statistics Canada data
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Potentially offshorable Jobs
Sectors studied by McKinsey retail sales, health
care, banks, insurance, IT, software, auto
industry, pharmaceuticals
Québec Canada United States
Eight McKinsey Sectors 74,600 344,000 3,402,500
All sectors 280 000 1 200 000 11,856,000
Authorss calculations from McKinsey (2005) and
lEnquête sur lemploi, la rémunération et les
heures de travail, 2004 (Statistiques Canada 2005)
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Jobs Offshored

• 1,5 millions already offshored across the world
  in 2003
• McKinsey this number will reach 4.8 million en
  2008
• 2.5 of potentially offshorable jobs would be
  offshored

Projection of effectively offshored jobs, 2003-08 Projection of effectively offshored jobs, 2003-08 Projection of effectively offshored jobs, 2003-08
United States Canada Québec
210,000 21,500 4,900
Calculs des auteurs daprès létude de McKinsey
(2005) et lEnquête sur lemploi, la rémunération
et les heures de travail, 2004 (Statistiques
Canada 2005)
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What impact on Jobs? A Summary
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Summary observations on the impact of services
offshoring in Canada and Québec

• Canadian Context
• -Cost advantage compared to US
• Availability of qualified and flexible labor
  force
• Stable business environment
• Factors specific to Québec
• -Large public sector is a buffer against some
  types of offshoring
• Language is obstacle to offshoring for some
  services
• Potential effect is important, but not
  catastrophic
• Net impact (with inshoring) is unknown (possibly
  positive)

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Other potential impacts (apart from jobs)

• In theory, global impact is positive as for trade
• BUT downward pressure on wages
• In USA concern about losing technological edge
• Some economists project increases in wage
  inqualities
• Impact small compared to that of technology
• Concern about security and privacy
• In USA security concerns impede some projects
• In Canada Concern over access to personal
  information by FBI

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4. How is the United States reacting?
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What is the U.S. federal government doing?

• Not much
• A dozen bills introduced in 2005
• Mostly by Democrats
• Only one minor bill adopted by Congress

• George Bush is steadfastly opposed to any legal
  limitations to offshoring by U.S. companies,
  which makes him very popular

in India!
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What are the states doing?

• 224 bills introduced in 2003-2005
• 52 ? Redefine public procurement rules to limit
  access to firms that execute these contracts in
  whole or in part abroad.
• 13 ? Restrictions to data that can be sent
  overseas.
• 12 ? Obligation to reveal the location of call
  centers.
• 6 ? Restrictions to public assistance programs
  for firms that practice offshoring.
• 5 ? Firms must notify government when jobs are
  offshored.
• 12 ? Other measures (mostly calls for studies)

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Examples?

• New Jersey (May 05) All work for public
  contracts must be performed in the U.S.
• Indiana (March 04) Penalty of 1-5 applied to
  out-of-state service providers bids
• Tennessee (May 04) Preference to call centers
  and data processing centers located in the U.S.

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Who does What? Anti-Offshoringbills in state
legislatures
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Who does What? Laws and executive orders adopted
in the states
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Why this Anti-Offshoring Protectionism?Is this
 trade politics as usual 

• The political economy of offshoring does not look
  like trade politics as usual
• Employment in import-competing industries has no
  significant effect
• Employment in export-oriented industries has a
  positive and significant effect on protectionist
  legislative activity
• Factor-related variables matter most
• Unionization and intermediary skill acquisition
  have strong and consistent effects
• ? i.e. Political forces aligned along class
  lines
• College/University education has a mixed effect
• ? i.e. Resistance to offshoring in high-tech
  areas

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What are the possible effects of these policies?

• The measures can be legally debatable
• Against federal authority on international trade
• Measures may violate interstate trade rules
• They could violate trade agreements/treaties
• The direct effect of anti-offshoring legislation
  is marginal for the moment
• Except with regard to the rapport de force
  between unions and management in firms
• The most important effect could be indirect
• The political debate over outsourcing could lead
  to a revival of protectionism in the U.S.
• The issue did not have political traction in
  2004, but it could be different in 2006 and 2008

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A key election issue in 2006 and 2008?

• In 2004, Americans voters were primarily moved by
  security considerations

but the situation may be quite different in 2006
Source Greenberg Quinlan Rosner Research
(November 2004 March 2006).
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5. What impact on Canada and Québec?
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Conclusions (on employment)

• The direct impact of services offshoring in
  Canada and Québec is limited
• Québec 280,000 jobs on the line BUT only about
  5,000 are likely to be offshored (2003-08)
• Indirect impact are sizable
• Weakening of the bargaining power of unions in
  sectors previously little exposed to
  international competition
• An offshored jobs may not necessarily be
  lost
• Some firms that resort to offshoring manage to
  re-affect their workers or offer them voluntary
  retirement packages
• But a threatened jobs may be lost because of
  the competitive environment defined by offshoring
  without being offshored
• For example Quebecor closes Télexpert
  (unionized) to re-direct the functions to
  non-union call centers, under pressure from
  competition in the industry

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Conclusions (on the United States)

• Canada and Québec are in a good position to
  benefit from offshored functions by U.S. firms
• Modest but still significant cost advantage for a
  qualified labor force
• Proximity and relative security
• But this favorable position is vulnerable
• Factors that limit the expansion of offshoring in
  low-cost countries (China, India, etc.) are
  changing to their advantage
• Anti-offshoring protectionism in the United
  States, even if directed mostly at competition
  from low-cost countries, can have a negative
  impact on Canada
• What to do?
• Maintain and improve the advantages associated
  with the business environment and, primarily,
  with the quality of the labor force.
• Remain vigilant and proactive in the face of
  American protectionism

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Some readings

• Pierre Martin,  The Rise of Services Offshoring
  and its Policy Implications in North America ,
  Canadian Foreign Policy, June 2006.
• Pierre Martin,  Globalization, offshoring, and
  American trade politics  prospects for Canada-US
  trade , Options politiques / Policy Options, 26
  (February 2005), p. 82-86.
• Christian Trudeau and Pierre Martin,  Limpact
  des délocalisations sur lemploi dans les
  services estimations préliminaires pour le
  Québec, le Canada et les États-Unis , Notes
  Analyses 11, CÉPÉA, March 2006.
• Pierre Martin and Christian Trudeau,  Limpact
  des délocalisations sur lemploi dans les
  services estimations préliminaires pour le
  Québec, le Canada et les États-Unis , Notes
  Analyses 11, CÉPÉA, April 2005.
• Linda Lee, Christian Trudeau, and Pierre Martin,
   Délocalisation outre frontière de lemploi 
  mise à jour sur lactivité législative aux
  États-Unis , Notes Analyses 7, CÉPÉA,
  September 2005.

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