Date: Wed, 24 Mar 2004 23:49:48 -0800 From: Norm Matloff To: Norm Matloff Subject: shell game on balance in trade in services To: H-1B/L-1/offshoring e-newsletter As you know, the supporters of offshoring of "routine" software work claim that this frees up American programmers to do "higher-level" software work. Significantly, Catherine Mann, who is cited in this article, is one of those making that argument. (See my detailed critique of Mann's work in my recent posting, at http://heather.cs.ucdavis.edu/Archive/Mann.txt) The article enclosed below discusses a report released by the Dept. of Commerce last week which trumpets a surplus in U.S. international trade in services. The message is that we export more in services than we import, and the imports (in this case. offshoring) drive that engine, so don't try to restrict offshoring. Well, as with the Mann report, this argument relies on a highly misleading aggregation of numbers that ought to be viewed separately. To get such a view, go to DOC's site, at http://www.bea.gov/bea/di/1001serv/intlserv.htm I will discuss the data from Table 1 at that site, but I do recommend looking at the other tables too, e.g. the ones giving breakdowns by country. To get an idea of how wrong it is to aggregate these data, note first that a major category of "services" is transportation! This is typically around 30-50% of the total. This includes tourism, international freight fees, etc. The category that is relevant to software professionals and Mann's argument that they benefit from offshoring is Computer and Data Processing Services. DOC defines this as consisting of ...the following five categories of services: (1) Data entry, batch and remote processing, and tabulation; (2) computer systems analysis, design, engineering, and custom programming; (3) integrated hardware and software systems; and (4) other computer services, such as timesharing, maintenance, and repair. See www.bea.gov/bea/articles/INTERNAT/ INTSERV/Meth/itguide.pdf (There is also a Database category, but that refers to fees people pay to use certain databases, say stock market data. Though this does lead to some employment of programmers etc., it is less direct and thus I won't discuss it here. However, the trend in this data is similar to that of the Computer and Data Processing Services category.) Here are the numbers: direction 1999 2000 2001 2002 --------- ---- ---- ---- ---- exports 3312 3262 3217 3004 imports 1323 1452 1419 1057 The exports (bigger is better) show a modest but steady decline, while except for 2002 the imports (smaller is better) show an upward trend. (The data for 2003 are not in yet.) Sure, exports are still greater than imports, but that is to be expected, since the U.S. started out with such a huge lead over India and other IT offshoring countries. But the data certainly suggest that that lead is eroding. That sure isn't what the enclosed Wall Street Journal article suggested, and it is contrary to the the benefit that Mann promised U.S. software professionals. But the table does show a category of services in which imports increased quite a bit during 1999-2002: Financial Services! Yes, including Securities Transactions! In other words, we lose IT income to India, but they use the money to buy U.S. stocks, so the economists say it's a net benefit to us! (And even better, the H-1Bs and L-1s fly U.S. airlines, contributing to a surplus in the all-important Transportation category.) You will see this claim of a trade surplus in services quite a bit in the coming months. Several articles appeared in the last few days, similar to the WSJ one below. And Marc Andreeson, formerly of Netscape but now in the offshoring business (his company shows clients how to offshore), stressed that argument on the Lou Dobbs Show. But now you see why the argument is highly misleading. Norm http://www.sulekha.com/hoppercomments.asp?cid=329514 Mon, Mar 15, 2004 THE WALL STREET JOURNAL ONLINE, MARCH 15, 2004 MORE WORK IS OUTSOURCED TO U.S. THAN AWAY FROM IT, DATA SHOW By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- Despite the political outcry over the outsourcing of white-collar jobs to such places as India and Ghana, the latest U.S. government data suggest that foreigners outsource far more office work to the U.S. than American companies send abroad. The value of U.S. exports of legal work, computer programming, telecommunications, banking, engineering, management consulting and other private services jumped to $131.01 billion in 2003, up $8.42 billion from the previous year, the Commerce Department reported Friday. Imports of such private services -- a category that encompasses U.S. outsourcing of call centers and data entry to developing nations, among other things -- hit $77.38 billion for the year, up $7.94 billion from 2002. Measuring imports against exports, the U.S. posted a $53.64 billion surplus last year in trade in private services with the rest of the world. Under government accounting, when a U.S. company opens a technical-support center in India that handles inquiries from the U.S., that is considered a U.S. import of services. When a U.S. lawyer in New York does work for a German auto company or a New York investment banker works on a deal for a Japanese company, that is an export of services. The numbers suggest that congressional efforts to restrict outsourcing by U.S. companies may backfire, if they provoke retaliation by U.S. trading partners. Economists also say that U.S. service exporters -- insurers, for instance -- might lose some competitive edge if they can't use foreign suppliers for call centers or other back-office operations. "If you try to protect and limit outsourcing, you will have a negative impact on the exports of service activities, which generate a lot of jobs," said Catherine Mann of the Institute for International Economics, a Washington policy research group. Despite the developments in services trade, the current-account deficit, the most inclusive measure of the U.S. trade gap, hit another record in 2003, reaching $541.8 billion, or 4.9% of the gross domestic product, up from $480.9 billion in 2002, or 4.6% of GDP. The increase came even though the deficit for the final three months of year narrowed to $127.5 billion, from $135.3 billion in the third quarter. The white-collar trade issue has risen to the top of the political agenda and has led to legislative proposals to prevent outsourcing, or expose it when it occurs. Sen. John Kerry of Massachusetts, the likely Democratic presidential nominee, wants U.S. companies to reveal to callers that their telephone inquiries are going overseas. Others in Congress legislation to restrict government contractors from sending work abroad. Politicians have largely ignored the jobs created in the U.S. when Americans sell white-collar services to foreign customers. "I can understand why members of Congress are responding to what a lot of constituents feel, and I can understand why their constituents feel that way because there has been so much publicity about the potential loss of jobs," said J. Robert Vastine, president of the Coalition of Service Industries. But, he said, "a lot of it is hype, and one of the big problems in this debate is there hasn't been enough analysis." In addition to hiring more U.S. businesses to provide services, foreigners doubled last year the amount of money invested in U.S. companies, plants, offices, stores and other facilities. That foreign direct investment swelled to $81.98 billion in 2003, from $39.63 billion in 2002, the government said. Write to Michael M. Phillips at michael.phillips@wsj.com Updated March 15, 2004 1:56 a.m.