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Focus on Open Markets Not Attacking Outsourcing

By JIM GRADOVILLE

In recent months, hardly a day has gone past without American businesses coming under fire for outsourcing jobs to China and India. Such critics miss the real issue, which is the need to correct inequities in bilateral trading relations and address issues of market access -- rather than hamstring the ability of U.S. companies to utilize the advantages offered by countries such as China.

Open markets allow American companies, and thereby the U.S. economy as a whole, to remain competitive. Over the past few years, American exports to China have increased significantly. These have risen 75% since China joined the World Trade Organization in 2001, which contrasts remarkably with a world-wide decline in U.S. exports over the same period. And earnings of American companies in China have also improved, with 75% of the companies that responded to an American Chamber of Commerce in China survey last year indicating they were profitable in 2002. However, the continued ability of U.S. companies profitably to do business in China depends on American lawmakers showing their commitment to open and fair trade.

Outsourcing is not new; it has been going on for decades. The U.S. has dealt with this by remaining the world's most open and flexible economy, much to the advantage of the average American. What is new are the recent election-year proposals that would, in some cases, penalize U.S. companies that try to maintain their competitive position by outsourcing jobs.

In February, the Jobs for America Act was introduced in the U.S. Senate. If enacted, it would require companies to give three months notice of any plan to outsource 15 or more jobs. In March, the Senate overwhelmingly approved a measure banning companies from bidding for federal contracts if they plan to outsource any of the work involved overseas. Over the past two years, legislative proposals have been introduced in over 20 states to outlaw various forms of outsourcing or penalize firms doing it. Fortunately, few if any of these proposals have become law. To do so would be wrongheaded and only serve to make U.S. companies less globally competitive, thereby depressing profits, reducing share prices, and discouraging employment in America.

Today's competitive environment requires companies to manage complex global-supply chains where products often pass through a series of countries in a tightly choreographed process. This all contributes to America's global competitiveness, because U.S. companies are leaders in supply-chain and global-organizational management. But, if American companies do not have the freedom to organize themselves in the most efficient way possible, European, Japanese and Korean competitors will take market share from us. This will inevitably lead to a decline in American competitiveness; causing U.S. companies to go bankrupt, and accelerating job losses.

We've not disputing the commitment of lawmakers in Washington and the state capitols to long-term prosperity and job creation. But these measures are the wrong way of achieving those goals. Instead the focus should be on promoting American goods and services overseas, and addressing barriers to market access. That's why the Bush administration has placed such a high priority on pressing for the opening of overseas markets with China as a primary target.

To many -- including a large number of companies doing business here -- China's market still looks like an uneven playing field. Even though American exports to China are rising and the U.S. is China's largest foreign market, the growth of American exports has not kept pace with overall growth in China's imports. That's partly because China's market has yet to be fully opened, and the country imports many raw materials that America does not sell on the global market. A number of non-tariff barriers, including, a lack of distribution rights, the issuance of unreasonable technology standards, and extremely high capitalization requirements all inhibit the ability of U.S. companies to sell products and services in China.

Perhaps the greatest opportunities denied to U.S. companies in this burgeoning market are a result of China's failure to vigorously protect intellectual property. Companies from America's strongest industries including consumer goods, pharmaceuticals, media and entertainment, semiconductors and software  are hurt by pirates and counterfeiters. Pirated music CDs and movie DVDs are sold on the streets of Beijing with impunity. Fake copies of drugs patented by U.S. pharmaceutical companies, or worse  poor imitations of those products  are sold to an unknowing public. There is also an exasperatingly widespread use of pirated software on computers in China's government agencies. Sadly, many of America's leading companies look at this situation and refuse to enter the market because of the risk of losing their most valuable assets.

But there are signs the Bush administration is taking action to address these problems. Washington recently filed its first complaint against China for breaching World Trade Organization obligations, by providing tax rebates to domestic semiconductor manufacturers. And [last month] Vice Premier Wu Yi led a delegation of senior Chinese leaders to Washington, D.C. for Cabinet-level bilateral meetings on commerce and trade.

The focus should be on pressing China to continue to  open its markets and honor its WTO commitments. That, rather than, a misguided crusade against outsourcing, which will only cost jobs in the long run, is the best way to assure America's economic future.

Jim Gradoville is chairman of the American Chamber of Commerce in China. This commentary first appeared in The Asian Wall Street Journal on April 12, 2004.