The Washington PostDemocracy Dies in Darkness

Trump can’t decide if outsourcing is good or bad. Here’s what economists say.

Moving production overseas can boost overall employment -- but not for everyone.

Donald Trump, basking in Super Tuesday triumph, isn't sure what he thinks about offshoring. (Jabin Botsford/The Washington Post)
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On Wednesday, Buzzfeed caught Donald Trump in a contradiction. A decade before railing against China and Mexico for "taking our jobs," and promising to bring work back to the states, he was telling students at his for-profit Trump University that sending jobs overseas can actually be good for the economy.

A 2005 post by Trump on the school's now-defunct blog reads:

We hear terrible things about outsourcing jobs—how sending work outside of our companies is contributing to the demise of American businesses. But in this instance I have to take the unpopular stance that it is not always a terrible thing.
I understand that outsourcing means that employees lose jobs. Because work is often outsourced to other countries, it means Americans lose jobs. In other cases, nonunion employees get the work. Losing jobs is never a good thing, but we have to look at the bigger picture.

Trump went on to describe a study co-authored by Nobel Prize-winning economist Lawrence Klein, which found that outsourcing some IT functions allowed firms to increase their productivity, and thus possibly hire more Americans. The study, conducted principally by the economic consulting firm Global Insight, was funded by a trade group called the Information Technology Association of America, which was then pushing to loosen rules on offshoring. Predictably, it concluded that offshoring would actually create hundreds of thousands of net new jobs by 2010, boost wages, and increase demand for U.S. goods.

Trump's debate with himself, however, also reflects one that's been going on in the economics community for years: It's very difficult to get a handle on how many jobs have been lost due to outsourcing, and how many might have been created in the U.S. as a result.

Certainly, the headlines tell one story, as factories and call centers relocate south of the border or overseas, where workers are paid a fraction what they could make here. Just a couple weeks ago, Trump called out the heating and air conditioning unit maker Carrier Corporation for announcing it would move 1,400 jobs from Indiana to Monterrey, Mexico. Over the years, firms have increased the proportion of work they source from overseas affiliates, especially in services  as shown in this graph from an analysis by the Center for American Progress.

In manufacturing, both offshoring (in which U.S. companies locate production outside the country) and imports (which can be made by foreign companies and simply sold in the U.S.) accelerated after the normalization of trade relations with China in 2001, claiming millions of jobs.

But firms moving some aspects of their production to other countries is only one part of the story. As Trump said, and Washington Post business and economics columnist Steve Pearlstein explained during the 2012 election, reality is more complicated — and there's academic research to back that up.

For example, one study from 2012 found that offshoring in a wide range of manufacturing industries was correlated with a small increase in overall employment, due to increases in productivity. Another, from 2007, connected offshoring with wage increases as well. A 2011 survey of research studies by the World Trade Organization found that on balance, offshoring had only minor impacts on the total number of jobs.

"In the long run, there is no indication that trade or offshoring leads to higher unemployment (or lower employment) overall, although employment of low-skilled workers may suffer while high-skilled employment may expand," wrote author Holger Görg. "While the literature finds that these effects are statistically significant, the economic magnitude thereof is still debated, with many studies concluding that they are economically negligible."

As Görg mentioned, though, those overall employment levels hide something really important: Offshoring tends to hit hardest for those in lower-skilled professions, while creating more jobs that require higher education. The effect also shows up in some studies on wages, with overseas competition lowering pay for workers without unique skills — so unless you manage to get retrained quickly, you might be left behind.

"The rich heterogeneity of the wage effects of offshoring, with respect to skill and occupational characteristics, suggests that offshoring plays an important role in income distribution and changes in income inequality," wrote the authors of another research survey published in February. And those on the losing end of offshoring are the same ones hurt by automation, as machines learn to perform their jobs.

One of Trump's favorite punching bags, Apple, is actually a good example of this dynamic at work. The authors of a 2012 study on the relationship between offshoring's effect on people with varying skill levels write:

"Without the opportunity to offshore assembly tasks, it may not have been profitable for Apple to introduce some of the new varieties of iPods because of the higher labor costs it would have faced. This would have reduced the demand for high-skill engineering and design jobs in Apple, corresponding to the 'price effect' which creates a positive link between offshoring and skill-biased technical change. Counteracting this, without offshoring opportunities, Apple may have designed iPods differently in order to reduce its dependence on expensive domestic unskilled labor, with potentially adverse effects on the demand for unskilled workers in the United States; this illustrates the 'market size effect,' which creates a negative link between offshoring and skill-biased technical change."

Ironically, however, the effect of offshoring on workers may be winding its way to a resolution. In parts of the United States, as the Post's Chico Harlan illustrated with a story about a new Chinese plant in Alabama, offshoring and import competition have depressed the wages of low-skilled workers to the point where many U.S. jobs are now competitive with those overseas. Taking into account the efficiencies created by robots and the increasing risk of long supply chains, companies now can bring production jobs back to the U.S.— although usually at much lower salaries.

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