U.S. President Donald Trump campaigned on a promise to bring jobs back to America. But his plan to limit outsourcing of manufacturing jobs may be flawed, according to research from the UBC Sauder School of Business.
Professors Jan Bena and Elena Simintzi are currently researching how access to cheap offshore labour due to the 1999 U.S.-China bilateral agreement affected U.S. companies' innovation.
In this Q&A, Bena discusses how limiting offshore labour won’t necessarily lead to more jobs in the U.S.
Based on your research, would Trump’s strategy bring jobs back to America?
It’s unlikely. Our research suggests that stopping the globalization of work may not lead to more jobs in the U.S. This is because companies can respond to limiting offshore labour by investing more in process innovation, such as automation, and relying less on labour overall.
Take, for example, the case of Carrier heating and air-conditioning, which came under fire from Trump during the election campaign for moving jobs to Mexico. Trump offered the company a tax cut to keep jobs in Indiana, but the money was eventually invested in more automation instead. At the time, Carrier CEO Greg Hayes said the company was competing with 80 per cent lower labour costs in Mexico, so automation was the only way to drive down production costs in the U.S.
Why do companies rely on offshore labour, and what effect does this have?
It all comes down to cost. There are two main ways U.S. firms can lower their production costs: by substituting U.S. labour for cheaper offshore labour, and by investing in the development of new labour-reducing technologies, such as automation.
China’s integration into the global economy— primarily the result of the 1999 U.S.-China bilateral agreement— has resulted in a large flow of investment by foreign companies looking to tap into China’s cheap labour market. Our research shows that innovation aimed at reducing production costs within these firms decreased by 25 per cent following the 1999 agreement, since it became more profitable to use cheap offshore labour than to focus on automation.
How can governments adapt labour policies to these economic forces?
Anti-globalization rhetoric seems to be on the rise around the world. Anxieties about job loss among the public in developed countries are understandable and the labour market challenges need to be addressed by public policy.
What we are contributing to this debate is that solutions that seem obvious at first may have unintended consequences that will make them ineffective, possibly leading to big disappointment. Specifically, restricting offshore labour may fail to create domestic jobs and, at the same time, it will hamper benefits that globalization brings about, such as the large variety of inexpensive goods everyday shoppers are accustomed to in the developed world.
We argue that public policy aimed at addressing the labour market challenges needs to be more nuanced and thought through.
Bena co-authored this paper with UBC Sauder Professor Elena Simintzi. Their working paper, “Globalization of Work and Innovation: Evidence from Doing Business in China” can be found here.
Limiting cheap offshore labour doesn’t always create domestic jobs