There Is More Than Coal, Steel, and Manufacturing at Stake

The Trump administration’s emphasis on U.S. job losses in steel, coal, and manufacturing industries to low-cost offshore locations is a justifiable emphasis given the devastation visited on Rust Belt communities after years of neglect and hostility by the Obama administration. A clear and present danger is at our doorstep, however, if we ignore the outsourcing juggernaut in highly paid and crucial technical disciplines such as product engineering, research and development, and information technology. In excess of one million well-paying jobs have been outsourced by the likes of IBM, General Electric, Dell, Hewlett Packard, Accenture, Computer Sciences Corporation, Intel, Cognizant, Xerox, HCL, Infosys, Wipro, and TCS among many others during the last ten years. What is worse, many more millions of jobs are presently the subject of board room discussions awaiting a green light so they too can be jettisoned to an offshore location.

In fact, many companies may feel the urge to accelerate their outsourcing decisions while giving the new administration a head fake by adding some jobs domestically. IBM’s announcement, for example, that it plans to add 25,000 new jobs in the United States over four years is welcome news but pales in comparison to the more than roughly 75,000 jobs it has already outsourced to offshore locations. In addition to the great human suffering that has been brought about by outsourcing on workers and their families, incremental job losses in the orders of magnitude which are in the offing will have a marked impact on tax revenues and the nation’s ability to fund social services.

THE NATION’S SECURITY IS AT RISK

The dramatic loss of jobs and people talents, if left unattended, represents a national security risk to our nation from which we might not be able to recover. It is worth noting that five of the above-named companies (Cognizant, HCL, Infosys, Wipro, and TCS) are Indian owned. These companies – in effect sophisticated placement agencies – have become adept at gaming the H1-B lottery system by filing many more visa applications than are needed in order to increase their chances of having their petitions selected. Individual, albeit highly qualified candidates, who do not play ball with these agencies or who choose to go it alone in the absence of immigration legal advice find it very difficult to offset the numbers advantage that these outsourcers enjoy. In fact, Indian outsourcers account for roughly two-thirds of all information technology jobs outsourced. India, in addition to being the beneficiary of trade preferences with the United States worth billions of dollars, also happens to be a nexus for a great deal of audit, tax and advisory work done on behalf of the Big Four accounting firms where there is nowhere near the regulatory oversight that clients would find in the United States. Apparently, it hasn’t occurred to the brass at the Big Four that college interns from American colleges are just as smart and cost-effective as hires in India especially when the coordinative and overhead costs of the latter are factored in. It is true, the United States currently has a cordial relationship with India but the geopolitical interests of nations always prevail and today’s friend could well turn out to be tomorrow’s foe. The nation simply cannot allow its precious technology assets to be in the hands of a foreign power.

THE TIME TO ACT IS NOW

As we argued in a previous essay, Globalization: An Anti-Democratic Nightmare in the Making, globalization threatens a nation’s sovereignty by ceding control to a supranational organization of unelected technocrats who presume to know better that a nation’s citizens. In a nutshell, that is the geopolitical risk of globalization. The economic risks, however, are just as profound. For the United States, in particular, the interconnectedness of world economies through so-called free trade agreements almost guarantees that investment capital, carbon footprints, and labor will move to developing nations.

The Trump administration must be determined in its efforts to swing the pendulum in the opposite direction by delivering the message to corporate leaders that the economic landscape is now markedly different. A coffee klatch in the Oval Office with business leaders, most of whom are avowed globalists with bottom line interests that transcend strictly domestic and economic patriotic priorities, simply will not get it done. Consider, for example, that General Electric’s CEO, Jeff Immelt, who left the President’s Manufacturing Council because, as he stated, he was morally offended at the President’s policy decisions was like a pig in mud while he did business with Iran by sidestepping U.S. sanctions through a foreign-based subsidiary. No moral umbrage seems to have been taken by Mr. Immelt in that case. And, if you wonder whether the CEO of a major multinational corporation cossets a globalist world view consider which of these CEO’s would say what Charlie Wilson, President of General Motors, said during his confirmation hearing for Secretary of Defense in 1953: “…I thought that what was good for the country was good for General Motors and vice versa.” It is the second half of Mr.Wilson’s statement thatwould be metwith disbelief if not opprobrium by today’s multinational CEO’s.

It will take nothing less than an aggressive jawboning, marketing, education, and an occasional strong-arming campaign to get the attention of corporate leaders who are contemplating technical outsourcing decisions before it is too late. The Department of Commerce Secretary might be an ideal candidate for helping to deliver this message. The message to corporate leaders makes financial good sense because a lot has changed and more is expected to change with the new administration at the helm. Here’s how:

  • DIMINISHED ROI: The Chinese and Indian cost advantage has begun to slip. These overheated markets are in evidence in wage inflation, worker turnover, and job hopping. The upshot of these developments is that U.S. companies can expect diminished   quality and service from these long-standing low-cost providers as their margins continue to be squeezed. Nonetheless, the continued plunder of our nation’s intellectual capital by nations – China foremost among them – should give U.S. companies pause and be met by stiffer than prescribed border taxes. Recent low-cost actors on the scene like Malaysia, the Philippines, and Viet Nam are tactical threats and call for our vigilance but they lack the sustainable comparative advantages of China or India.
  • GOVERNMENT CONTRACTING NEEDS TO DO ITS PART It’s not just companies that have to do their part in making America great again. Offshore outsourcing of government projects at both the federal and state level, unfortunately, is alive and well. A handful of states do have broad prohibitions against offshore outsourcing of government contracts. Most states, however, have neither the statutory nor the regulatory prohibitions that keep contractors or their subs from taking work offshore. It is clearly disingenuous for politicos to clamor for business leaders to refrain from outsourcing jobs offshore when their own state contracts have no such prohibitions. The federal government, however, can discourage the states’ inclination to outsource projects offshore by tugging at the right purse strings much as it intends to do by throttling federal financing for sanctuary cities.     
  • AMERICAN WORKER AFFORDABILITY AND AVAILABILITY: An important consequence of a decades-long outsourcing tsunami is that wages in the U.S. for technical positions have either stagnated or risen minimally. These positions can now be re-filled at a more moderate cost especially considering that only one in two STEM (science, technology, engineering, and mathematics) graduates are working in STEM jobs according to the Economic Policy Institute.
  • WORKFORCE RESTORATION INCENTIVES: Workers – both white and blue collar – formerly displaced by outsourcing are now available in unprecedented numbers. Many if not most of these workers, however, will need retraining and refreshing of skill sets and until that need is addressed job openings in large numbers will persist in the economy. This will require a serious financial corporate commitment to address. An incentive that might be considered is to offer hiring companies       job-training tax credits on a progressive scale. That is, tax credit percentages that step up with increasing numbers of new hires. Not only is this good business for the hiring company but one can only imagine what a morale boost, workers will experience by participating in training not just for its own sake but as an activity antecedent to a good paying job.
  • REDUCED CORPORATE TAX BURDEN: An important rationale for U.S. corporations to outsource offshore lay clearly at the feet of our world-leading corporate tax rates. That was then. President Trump’s passage of the Tax Cuts and Jobs Act of 2017, however, reduces the corporate tax rate to 21% making the nation’s tax structure more competitive around the world.
  • REPATRIATION INCENTIVE: The Tax Cuts and Jobs Act of 2017 also allows companies to repatriate foreign income at 15.5% for cash and cash equivalents, and 8% for illiquid assets such as inventories, property, plant and equipment – derivatives and swaps would come in for special attention. Clearly, these preferential rates will give corporations with offshore hoards of cash a sizeable incentive to reinvest in the United States if it is understood that those cash hoards will not simply be returned to shareholders in the form of a dividend.
  • SERVICES VAT AVOIDANCE:  The Trump administration needs to persist in the imposition of tariffs on imported goods – especially those critical to the nation’s national defense – as the nation’s accumulated trade deficit of $10 trillion cannot be allowed to grow. Imported services call for a different approach but the principle is one and the same. Companies that import services, should not be off the hook any more than those which import automobiles. A value added tax (VAT) which, for practical purposes, works like a tariff should be imposed on companies that have outsourced service work and brought back into the country a so-called value-added deliverable. As it turns out, our country is virtually alone in the world without a VAT. If the imposition of a VAT came to pass and if, say, General Electric outsourced – either directly or through a state-side contractor whether foreign or domestic – software development for a new order entry system to India and received a monthly invoice from the Indian contractor for a million dollars, a VAT of 20% or $200,000 – European Union countries, as a point of reference, charge on average 20% – would be slapped on GE on the gross amount of $1 million. Exchange or barter transactions would not be excluded from the VAT assessment so as to close that potential loophole.
  • CYBER INFRASTRUCTURE WORK: Cyber-security priorities have never been as critical as they are today. The nation operates mission-critical applications such as the IRS, Medicare, and Social Security systems, over outdated information technology infrastructures. These systems will require large numbers of contractors staffed by many thousands of specialized technicians to upgrade. This work represents projects of large scope that will last for years to come with all of the attendant recurring revenue. Clearly, it would be strategically imprudent for the nation if this work were done offshore.
  • EQUITABLE GUEST WORKER PROGRAMS: In the 1990’s Senator Spencer Abraham of Michigan offered the most prophetic assessment of the guest worker situation at the time and his words still ring true: “If American companies can’t bring the talent here to fill their needs…they’ll move some of their operations overseas.” Guest worker programs do have a place in a dynamic and growing economy but they must be fair to indigenous workers. Already the Immigration and Nationality Act requires that the hiring of a foreign worker should not adversely affect the wages and working conditions of American workers. It isn’t clear, however, that this regulation has been strictly enforced and in practice employers can find many workarounds. A stiffened regulation would call for a more strict reporting and audit mechanism with severe penalties to lawbreaker companies. In addition, an updated regulation would require employers to train and employ domestic workers in numbers equal to the number of guest workers brought into the country. Finally, an H1-B visa limit of 85,000 applicants for specialty occupations – a ceiling which hearkens back to 2004 or ancient history in internet time – is clearly outdated and must be increased to keep pace with the growth of the economy and the nation’s competitiveness on the international stage.

As I argue in a separate essay, Is the United States at End of Empire? the nation’s dominance on the world’s stage is at its twilight. That speaks to a long-term trend that is unfolding. No, our economic climax is not around the corner. But that it is not an immediately pressing matter, however, should disabuse us of the urge to return to the complacency which has beleaguered our nation for so long.



Management Advisor

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