U.S. Presidential Election in November 2004:
Democratic Party Candidates' Views on Offshore Services and Outsourcing

© William B. Bierce.  All rights reserved.

    As strategic advisors to law departments and senior management, Bierce & Kenerson, P.C. seeks to communicate a vision beyond the immediate need to solve a current business problem.  Beaming our headlights  "around the curve" of the policies of tomorrow's decision-makers and law makers, we digress into the field of the quadrennial political contest in America.  What will happen to outsourcing if a Democratic candidate wins the U.S. Presidential election in November 2004?   How will the legal framework change?   Which candidate wants the most drastic changes?

    As of early January  2004, there were 9 Democratic Party candidates for U.S. President for the election in November 2004.   As the candidates enter more debates and compete in primaries and caucuses that will send delegates to the Democratic National Convention in late July 2004, we take a look at their respective platforms on offshore services, outsourcing and international trade in goods and services. 

    Along the way, we discover some common ground and a few surprises.  This article begins with an overview and critique of their approaches, with some helpful suggestions.  Then we will address some core concepts of outsourcing that the candidates appear to have ignored.  Finally, to bring the issues into bold relief, we quote the political "platforms" of the various Democratic Party presidential candidates. 

I.    Overview of the Candidates' Policies on Outsourcing and International Trade.

    The nine Democratic candidates disagree on policies affecting outsourcing.  Many candidates lack a coherent plan for strengthening American competitiveness in the world economy.   Some who have a plan sometimes campaign on promises of legislative reforms that might be either illegal under World Trade Organization (WTO) multilateral trade agreements already binding on the United States, or that might already be covered by existing U.S. legislation.  The most sophisticated and elaborate policies are those of Senators John Edwards, Joe Lieberman and John Kerry and ex-General Wesley Clark.  The most dramatic changes are proposed by Dennis Kucinich, who would scrap the WTO.   Focusing principally on labor and environmental protections are ex-Ambassador Carol Mosely Braun, Rep. Dick Gephardt and ex-Governor Howard Dean.   Rev. Al Sharpton's platform does not speak to this issue.

·  Central Focus is U.S. Jobs.   With a few exceptions, each Democratic Party candidate has focused on protecting American jobs.  The loss of 2.5 million American jobs in the last few years evokes emotional debates over foreign "unfair competition."   The current debate echoes the debates in the 1980's over lack of foreign protection of intellectual property rights and unfair foreign governmental targeting of export trade through export subsidies and foreign governmental "regional development" incentives to expand local production capacity to serve global markets (not just local foreign markets).   Some Democratic Party Presidential candidates have highly refined programs to counteract the loss of manufacturing jobs.  However, only one -- Wesley Clark -- specifically addresses non-manufacturing industries affected by outsourcing.  Overall, their programs would seek to change the imbalance of international labor markets by improving labor conditions abroad (including one proposal, by dick Gephardt for an international minimum wage).   The more sophisticated candidates understand the links among education, training, incentive programs, trade adjustment assistance, government procurement strategies (including "buy American") and research and development.   However, adoption of many such programs could violate existing laws and international obligations of the United States, so a legislative mandate would be needed to fulfill the ambitious goals.

·  International Trade Agreements - Enforcement.    There is a debate whether international trade under existing rules is beneficial to the United States.  One candidate, Dennis Kucinich, would abrogate the WTO and NAFTA agreements, opting for bilateral negotiations with everyone.  However, according to the moderate Democratic Party view, as advocated by Wesley Clark, John Edwards, John Kerry and Joe Lieberman, the existing trade rules do not work for lack of enforcement, some of which was foreseeable when the U.S. agreed to allow China into the WTO.   Virtually none of the Democratic Party candidates mentioned the Indian government's tax scheme for promotion of "export services," or any other foreign government's tax promotion of exports, or any enforcement remedies under existing international trade law.   Any export-oriented tax benefits and export subsidy programs would be subject to enforcement.   By the way, the U.S. has not yet repealed its own foreign income tax incentives under the Internal Revenue Code, adopted after the WTO's ban on the now-defunct "Foreign Sales Corporation" and "Domestic International Sales Corporation."  The candidates do not mention this controversial issue.

·    International Trade Agreements - Renegotiation.   Trade agreement enforcement alone cannot stop globalization.   So the battle cry is to reform existing trade agreements by adding stringent provisions protecting local labor.   Labor protections that the Democratic Party candidates would like to have foreign governments adopt include the right to associate and organize into unions, collective bargaining, minimum wages and elimination of "sweatshop" conditions. 

·    Tax Credits.   Tax policy serves as classic tool for economic policy.   The Internal Revenue Code of 1986 was hailed for some major simplification in tax structures, rates and deductions.   Since then, Congress has been hard at work on amending it.  Most Democratic Party candidates would adopt tax policy to promote both economic benefits to communities adversely affected by offshore outsourcing, but also as a social policy to support new skills.

·   Export Promotion.  Export promotion is an easy target for a political candidate.   Currently, export promotion is within the jurisdiction of multiple federal and state agencies, and simplification would yield greater centralized control.  Improving export promotion services, however, requires identifying foreign markets where American goods and services are competitive.   Export promotion is a difficult yet strategic task of government.  Yet such promotion is unlikely, alone, to stem the tide of offshore sourcing.

·Training and Education.   Training and education are lofty goals.   The voters should ask their politicians what types of training and education should be promoted.   In an age of outsourcing, skills in business process mapping, project management, process design and general management are critical.   Al Sharpton would like to have federal control over education policy.  Such controls might benefit quality if such skills were required as part of an "international skills" course in high school, with continuing education for workers.  All workers need to understand the difference between automated processes and human capital.

· Energy Independence.   Some candidates refer to energy independence.  The U.S. trade deficit in energy will be aggravated by continuing growth of global demand.  China already has been increasing demand in commodities and energy to fuel its manufacturing juggernaut.  Conservation, bioenergy, gas-guzzler taxation on gasoline (as in Europe) would all increase American buying power and sustain investment in local capital expenditures.  A company with a high energy bill will have less for salaries.   American economic freedom and leadership depend on greater flexibility that comes from reduced dependency on foreign energy. 

·  Pension Reform.   As some jobs leave for other countries, protecting the pensions of existing workers becomes a political priority.   The Democratic Party candidates address some of these issues, suggesting here an improvement in defined benefit plans, suggesting there a "cradle-to-grave" portability promise for pension benefits, and offering elsewhere to prevent corporate management greed from using the pension fund as a corporate kitty or as a tool for artificially inflating corporate revenues.   The truth is that, unless corporate operating expenses such high wages and high pension funds can be imposed on foreign service providers, the foreign service providers will always have a comparative cost advantage.  So increasing pension costs to American employers may have the counterproductive effect of inciting more migration of future job growth to foreign locations.

·    Labor Law Reforms.   Improving the job conditions of workers worldwide is a noble goal, particularly in an era of globalization.  As with the pension costs, any change in foreign labor law that improves worker conditions will help level the playing field across national boundaries.  So improving international labor conditions is a necessity to reduce "unfair" foreign competitive advantages.   However, even labor law reforms will not suffice to stem the tide of jobs to India, where labor laws are generally protective of the employee.  And imposing an "international minimum wage" would not prevent impoverished foreigners from taking work under abusive conditions.   Perhaps one solution would be to impose a requirement of compliance with anti-sweatshop laws as a condition of importation of goods, though enforcement would be a nightmare, and the American consumer would be paying a higher price.   If presented in this fashion, the voter as consumer needs to counterbalance the benefit of lower prices (as a consumer) against greater job security (if this link could be demonstrated) as a worker competing in the world economy.

·    Import Substitution and Regionalization.   Outsourcing succeeds as a management tool because it offers value to the customer.  Few Democratic Party candidates (aside from John Kerry and Joe Lieberman) appear to understand the "value proposition."  This value depends on who is doing the services and where the services are performed.  None of the Democratic candidates appears to distinguish among the various American trading partners, except perhaps to castigate or bemoan China.  None of the Democratic candidates appears to want to promote regionalization (e.g., NAFTA, CAFTA and CARICOM, for example) to promote trade.   And the import substitution programs appear focused on energy conservation.

II.    Some Practical Suggestions for the Politicians.  

    Politicians promote policies that translate into laws and that shape contracts.  The election's  impact on outsourcing could be immense.

    In addressing the issue of outsourcing, the Democratic Party candidates might wish to address the fundamental reasons why outsourcing of both manufacturing and services has become such a potent force in the American economy, and what to do about it.

    International business and investment -- the foundation of capitalism -- are the roots of outsourcing.   So long as capital, goods, people, technology and data flow across borders, outsourcing will continue to grow.  The Democratic Party candidates must undoubtedly understand, like Sen. John Kerry, that corporate America has to choose between "buy America for its employees" and "buy 'better'" for its shareholders and customers.   In this decision process, managers evaluate economic value added, in addition to simple cost.   Protection of the rights of domestic American labor and consumers involves a confrontation between capitalism and non-capitalist economies    But the roots of international outsourcing are deeper.

    Specialization of Function.   Outsourcing starts with the principle that everyone pursues a "core competency" that gives them comparative advantage, just as in Adam Smith's The Wealth of Nations.  For many American enterprises (and the U.S. subsidiaries of multinational enterprises), outsourcing can offer improved quality, or the same quality at reduced cost, because of specialization of function.  Anyone can become an outsourcer.   To do so, one must invest in people, technology and process skills.  The people skills critical to success of an outsourcer are those that involve process design (for which patents are now available under current American jurisprudence) and service delivery.

    Quality in Process Design.  The best outsourcers succeed because the internal business processes of their customers are not at the same level of refinement as those that the outsourcers offer.   In the mid-1990's, the world learned about the benefits of offshore software development and remediation because of a big push to overcome the challenges of the "Year 2000 Bug."   Rather than reducing errors, process designers hired by Chief Information Officers sought to optimize the iterative process of engineering "business process solutions."   Through constant attention to process design, outsourcers offer a quality that the typical organization -- even a multinational organization -- does not or chooses not to develop due to restraints on capital expenditures and valuations of investment (Return on Investment).

    Economies of Scale.  Any business process can become an economic advantage if there are economies of scale.  By identifying generic business processes and planning to scale for growth, outsourcers offer economic value to their customers and their customers' customers.  IBM and Sun Microsystems not only provide software tools for customers to develop and manage web portals, but also software to manage "server farms" and "grid computing" to enable optimization of use of technology investments.  Economies of scale at the global level for the basic justification for specialization of function, competitive advantage and "superior" service (cost-benefit) to customers.

    Process Innovation Results in Worker Dislocation.   Since the demise of the buggy whip (with the advent of the automobile), process innovation has resulted in worker dislocation.  The Trade Adjustment Assistance Act contemplates retraining and other temporary economic relief for temporary adjustments.   Those politicians who focus on adaptability and innovation will help their constituents deal with the realities of a digital telecom world.  

    Competitive Government.  On the whole, the Democratic candidates do not address the issue raised by President George W. Bush in seeking a competitive government.  The Democrats do not offer any structure for competitive pressure on government employees to be as efficient as the private sector.   Rather, they derive strength from government employee unions.  The issue of privatization (outsourcing of non-governmental functions) could be a key differentiator in the Presidential election.

    Anti-Inversion Rules Ignore America's Uniquely Disadvantageous International Tax Policy.   To stop any flight of corporate headquarters, several Democratic Party candidates would stop the right of U.S. corporations to re-incorporate abroad in tax havens. This argument ignores why re-incorporation (euphemistically called "inversion") might benefit shareholders.  The politicians ignore America's uniquely disadvantageous international tax system that taxes foreign income of foreign subsidiaries even before repatriation, while many other countries do not.  Anti-inversion rules would retain U.S. tax jurisdiction over foreign source income from foreign operations of foreign subsidiaries.   Proposed Treasury regulations, issued December 14, 2003, require disclosure to the IRS when corporations move their headquarters offshore or are taken over by a foreign company.

    The political candidates might wish to focus attention on cultivating laws and policies that make America a headquarters of choice.  America is a safe haven for companies and investors.   Since 2002, very few American corporations have moved their headquarters offshore.  Cultivating an attractive business climate is critical to attracting and retaining foreign investment and promoting economic growth.

    First, in the field of outsourcing, a U.S. headquarters may be the key to commercial success.  Many outsourcing companies engaged in international outsourcing have been established in the United States for purposes of maintaining an indigenous "look and feel," even though senior management is foreign-born and has more foreign employees abroad than those in the United States.  See, e.g., Cognizant Technology Solutions, Inc. http://www.cognizant.com, a young but successful IT consulting American company with operations in India.

    Second, American stock markets are open to foreign investors, who legally avoid U.S. income taxes on foreign portfolio stock transactions under the Foreign Investors Tax Act of 1962.  We welcome foreign investment in American companies.  Many American companies are owned by major foreign investors.   American investors own large stakes in foreign companies whose securities are traded on foreign or domestic securities exchanges.  Domestic pension funds invest abroad.  In short, multinationals owe allegiance to shareholders across many continents.

    Third, American multinationals have announced their establishment of foreign joint ventures and foreign subsidiaries, as they have done over the years.  Captive foreign service companies could well replace today's outsourcing service providers, as American companies seek to enhance their control over a global workforce.  The Democratic Party candidates offer no distinction between a foreign service provider and a foreign subsidiary.  This distinction may have critical significance for the competitiveness, indeed the viability, of American industry in the global economy, for the integration of American workers into a global workforce, and for the leadership that the next President needs to offer in promoting our national security, economy and human conditions.  

    Finally, on a relative scale, the U.S. serves as a legal safe haven in a troubled world, with a climate favorable to business and investment.  There are many other benefits of a domestic domicile.  Delaware offers foreign companies the right to re-incorporate there upon the occurrence of specified events, such as a revolution in the foreign domicile.  In short, the U.S. has strength as a headquarters country that can be highlighted, promoted and sold.  

    Updating the Concept of Antidumping.  Under existing U.S. antidumping laws, imports of goods are subject to "antidumping" duties if the price in the United States is "less than fair value," which generally refers to cost of production.   In 2003, President George W. Bush sent his Treasury Secretary to China to persuade the Chinese Government to permit its currency to float on currency markets.  This effort was a failure.  In 2004, the Democrats may want to redefine antidumping to cover trade in services, where the foreign exchange rate permits sale of services at "less than fair value."  This complex issue may emerge as an important legislative agenda for 2005 and beyond.

    Conclusions.   In conclusion, one can offer a few macroeconomic policy suggestions.   Voters need to decide which is more important, globalization or protectionism.  In large measure, it may be too late to have much choice on this question.  Major concessions to free trade have already been granted, both to the WTO and to China in the 1990's and early 2000's.  The new environment calls for entrepreneurial and innovative responses, with a favorable tax climate, to allow Americans to compete in the digital global services economy. 

    Candidates Wesley Clark, John Edwards, John Kerry and Joe Lieberman appear to have the most sophisticated and balanced approach to outsourcing, promoting fair trade according to principles of enforcing existing trade agreements and fairer trade by extending such agreements to improve the labor rights and environmental protections of foreign governments.   Candidate Howard Dean focuses only on labor, promoting fairer trade but not specifically advocating fair trade; he generally ignores the consumer.  Candidates Carol Mosely Braun and Al Sharpton appear not focused on outsourcing as an issue.

    The candidates should consider how the benefits of a global services economy can work, or be made to work.  Candidates Clark, Edwards, Kerry and Lieberman seem to offer the most logical plans for continuing America's integration in a global economy.

What the Democratic Party Candidates Say about Outsourcing.

    Carol Mosely Braun on Outsourcing
    Gen. Wesley Clark (Ret.) on Outsourcing
    Howard Dean on Outsourcing
    John Edwards on Outsourcing
    Dick Gephardt on Outsourcing
    John Kerry on Outsourcing
    Dennis Kucinich on Outsourcing
    Joe Lieberman on Outsourcing
    Al Sharpton on Outsourcing

Disclaimer:  The above links contain both quotations by candidates and commentaries and critiques. 

The list of candidates and links to their websites can be found at:
 http://www.democrats.org/whitehouse/candidates.html#braun
http://www.democrats.org/whitehouse/candidates.html

Additional Outsourcing Articles:

    International Outsourcing 101
    Trade Secrets in Outsourcing 
    Xenophobia in International Outsourcing
    International Trade Regulation of Outsourcing 
    Regional Free Trade Agreements in the Americas

 Dated: January 14, 2004