Pierre Martin, Université de Montréal
Services Offshoring : The Rise of China and Asia,
and its Effects on North America
Presentation at the CÉRIUM’s Summer School
China Risen
How it changes and changes us
Services Offshoring : The Rise of
China and Asia, and its Effects on
North America
“China Risen” Summer School of the Université de Montréal’s
Centre of International Studies (CÉRIUM), July 5, 2006
Pierre Martin
Associate Professor of Political Science
Director of the Chair in American Political and Economic Studies (CÉPÉA)
Centre of International Studies (CÉRIUM)
Université de Montréal
www.cepea.umontreal.ca
Five questions on services offshoring
•
•
•
•
•
1.
2.
3.
4.
5.
What is offshoring it and what is the problem?
Services Offshoring in China: What is going on?
What impact on jobs in North America?
How is the United States reacting?
What impact on Canada and Québec?
1. What is offshoring and
what is the problem?
What is offshoring? A simple illustration
Source:
USGAO
# 04-932,
p. 58.
What is the problem?
Americans no longer are afraid of
globalization and free trade…
…but perception is different when
it comes to offshore outsourcing
Source: Chicago Council on Foreign Relations, Global Views 2004, pp. 40 & 42.
2. Services Offshoring in China:
What is going on?
Western concerns about
China and services offshoring:
• 1. The bottomless pool of labor
• « In China, when you’re one in a million,
there are a thousand others just like
you. » (Thomas Friedman, The World is
Flat)
• 2. A repeat of the Chinese manufacturing
export dominance in the area of tradable
services
China as an offshore service location:
strengths and weaknesses
• Strength: Labor costs
• Weaknesses:
• Business environment
– High political risk
– Poor intellectual property protection
– Low cultural adaptability
• Services underdeveloped
Is the pool of qualified
service workers unlimited?
• 2005: 3.1 million university graduates, of which
600,000 new engineers
• USA: 1.3 million graduates; 70,000 engineers
• Cost of a Chinese engineer: 19% of its US
counterpart (India 12%; Canada 84%)
• Will North American engineers be swept away?
• Not so sure, says a McKinsey study…
The labor pool in China and India
seems unlimited…
Potential numbers… in
theory; thousands
China
India
Engineers
1,589
528
Finance/Accounting
945
2,273
Natural scientists
543
674
Analysts
202
537
Generalists
1,733
6,181
Support staff
97,506
92,635
…but appearances can be misleading
Potential numbers… in Numbers employable by
theory; thousands
MNC’s, thousands
China
India
China
India
Engineers
1,589
528
159
132
Finance/Accounting
945
2,273
142
341
Natural scientists
543
674
54
101
Analysts
202
537
252
371
Generalists
1,733
6,181
120
828
Support staff
97,506
92,635
4,875
4,632
Where to go offshore?
It depends on the MNC’s priorities
Canada
Chine
Inde
Costs (on 4)
1.10
3.21
3.47
Talents and availability (on 3)
2.40
1.17
2.26
Business environnement (on 3 )
2.03
1.76
1.14
Total (on 10)
5.52
6.14
6.87
Source : A.T. Kearney’s Offshore Location Attractiveness Index, 2005.
Services account for a small proportion of the
Chinese Economy (data World Bank 2003; % GDP)
80
75
Agriculture
Others
Manufacturing
Services
70
60
75
70
51
50
39
40
33
30
22
20
15 13
18
16
15
11
10
4
8
6 8
11
8
2
0
China
India
Japan
Mexico
USA
Summary observations
on services offshoring in China
• In China, the supply of employable labor is not
unlimited: as it did in India, rising demand is likely to
lead to increases in labor costs for the top talent
• In spite of the large pool of Chinese university
graduates, employable talent in the services is not easy
to find
• Business environment in China, notably the lack of
protection of intellectual property, is a weak point
• Growth in the services sector is more likely to occur as a
result of increased domestic demand for services than
demand for traded services
3. What impact on jobs in
North America?
What impact on Jobs?
Un/underemployment
Affected
Potentially
Offshored
Jobs
> offshored > Jobs
(OECD)
Jobs
(McKinsey)
(McKinsey)
New
Jobs
Net
Effect?
Insourcing
Employment in affected occupations
Secretaries
Accounting support staff
Accountants
Client services staff
Sales
Administrative agents
Engineers
Canada
271,100
178,300
171,300
164,800
140,900
151,400
109,300
Authors’ calculations from OECD estimates and Statistics Canada data
Québec
97,335
64,460
39,325
37,755
29,215
22,550
22,325
Potentially offshorable Jobs
Sectors studied by McKinsey: retail sales, health care, banks,
insurance, IT, software, auto industry, pharmaceuticals
Eight McKinsey
Sectors
All sectors
Québec
Canada
United States
74,600
344,000
3,402,500
280 000
1 200 000
11,856,000
Authors’s calculations from McKinsey (2005) and l’Enquête sur l’emploi, la rémunération et les heures de
travail, 2004 (Statistiques Canada 2005)
Jobs Offshored
• 1,5 millions already offshored across the world in 2003
• McKinsey: this number will reach 4.8 million en 2008
• 2.5% of potentially offshorable jobs would be offshored
Projection of effectively offshored jobs, 2003-08
United States
Canada
Québec
210,000
21,500
4,900
Calculs des auteurs d’après l’étude de McKinsey (2005) et l’Enquête sur l’emploi, la rémunération et les
heures de travail, 2004 (Statistiques Canada 2005)
What impact on Jobs? A Summary
Mesures de l'impact des délocalisations sur les emplois du secteur des services, en pourcentage de
l'emploi total
18,1% 23 592 000 emplois
Emplois
affectés
(OCDE)
17,0% 2 645 000 emplois
17,5% 637 000 emplois
9,1% 11 856 000 emplois
Emplois
menacés
(McKinsey)
7,7% 1 200 000 emplois
7,7% 280 000 emplois
0,2% 210 000 emplois
Emplois
délocalisés
(2003-2008)
(McKinsey)
0,1% 21 500 emplois
0,1% 4 900 emplois
0,0
2,0
4,0
6,0
8,0
10,0
12,0
Part de l'emploi total (%)
14,0
16,0
18,0
20,0
Summary observations on the impact of
services offshoring in Canada and Québec
• Canadian Context
-Cost advantage compared to US
-Availability of qualified and flexible labor force
-Stable business environment
•
Factors specific to Québec
-Large public sector is a buffer against some types of offshoring
-Language is obstacle to offshoring for some services
•
Potential effect is important, but not catastrophic
• Net impact (with inshoring) is unknown (possibly positive)
Other potential impacts (apart from jobs)
• In theory, global impact is positive as for trade
– BUT : downward pressure on wages
– In USA: concern about losing technological edge
• Some economists project increases in wage
inqualities
– Impact small compared to that of technology
• Concern about security and privacy
– In USA: security concerns impede some projects
– In Canada: Concern over access to personal information
by FBI
4. How is the United States reacting?
What is the U.S. federal government doing?
• Not much
• A dozen bills introduced in 2005
– Mostly by Democrats
– Only one minor bill adopted by Congress
• George Bush is steadfastly
opposed to any legal
limitations to offshoring by
U.S. companies, which
makes him very popular…
in India!
What are the states doing?
224 bills introduced in 2003-2005
52%  Redefine public procurement rules to limit access
to firms that execute these contracts in whole or in
part abroad.
13%  Restrictions to data that can be sent overseas.
12%  Obligation to reveal the location of call centers.
6%  Restrictions to public assistance programs for firms
that practice offshoring.
5%  Firms must notify government when jobs are
offshored.
12%  Other measures (mostly calls for studies)
Examples?
• New Jersey (May 05) : All work for public
contracts must be performed in the U.S.
• Indiana (March 04) : Penalty of 1-5% applied to
out-of-state service providers bids
• Tennessee (May 04) : Preference to call centers
and data processing centers located in the U.S.
Who does What? Anti-Offshoring
bills in state legislatures
Who does What? Laws and executive orders
adopted in the states
Why this Anti-Offshoring Protectionism?
Is this « trade politics as usual »
• The political economy of offshoring does not
look like trade politics as usual
– Employment in import-competing industries has no
significant effect;
– Employment in export-oriented industries has a
positive and significant effect on protectionist
legislative activity
• Factor-related variables matter most
– Unionization and intermediary skill acquisition have
strong and consistent effects
 i.e.: Political forces aligned along class lines
– College/University education has a mixed effect
 i.e. Resistance to offshoring in high-tech areas
What are the possible effects of
these policies?
• The measures can be legally debatable
– Against federal authority on international trade
– Measures may violate interstate trade rules
– They could violate trade agreements/treaties
• The direct effect of anti-offshoring legislation is
marginal for the moment…
• Except with regard to the “rapport de force”
between unions and management in firms
• The most important effect could be indirect:
– The political debate over outsourcing could lead to a
revival of protectionism in the U.S. …
– The issue did not have political traction in 2004, but it
could be different in 2006 and 2008
A key election issue in 2006 and 2008?
In 2004, Americans voters
were primarily moved by
security considerations…
… but the situation may be
quite different in 2006
Source: Greenberg Quinlan Rosner Research (November 2004 & March 2006).
5. What impact on Canada and Québec?
Conclusions (on employment)
• The direct impact of services offshoring in Canada and Québec is limited
– Québec : 280,000 jobs on the line BUT only about 5,000 are likely to be
offshored (2003-08)
• Indirect impact are sizable :
– Weakening of the bargaining power of unions in sectors previously little
exposed to international competition
• An “offshored” jobs may not necessarily be “lost”…
– Some firms that resort to offshoring manage to re-affect their workers or offer
them voluntary retirement packages
• But a “threatened” jobs may be “lost” because of the competitive
environment defined by offshoring without being “offshored”
– For example: Quebecor closes Télexpert (unionized) to re-direct the functions
to non-union call centers, under pressure from competition in the industry
Conclusions (on the United States)
• Canada and Québec are in a good position to benefit from
offshored functions by U.S. firms
– Modest but still significant cost advantage for a qualified labor force
– Proximity and relative security
• But this favorable position is vulnerable
– Factors that limit the expansion of offshoring in low-cost countries
(China, India, etc.) are changing to their advantage
– Anti-offshoring protectionism in the United States, even if directed
mostly at competition from low-cost countries, can have a negative
impact on Canada
• What to do?
– Maintain and improve the advantages associated with the business
environment and, primarily, with the quality of the labor force.
– Remain vigilant and proactive in the face of American protectionism
Some readings :
• Pierre Martin, « The Rise of Services Offshoring and its Policy
Implications in North America », Canadian Foreign Policy, June 2006.
• Pierre Martin, « Globalization, offshoring, and American trade politics :
prospects for Canada-US trade », Options politiques / Policy Options, 26
(February 2005), p. 82-86.
• Christian Trudeau and Pierre Martin, « L’impact des délocalisations sur
l’emploi dans les services: estimations préliminaires pour le Québec, le
Canada et les États-Unis », Notes & Analyses # 11, CÉPÉA, March 2006.
• Pierre Martin and Christian Trudeau, « L’impact des délocalisations sur
l’emploi dans les services: estimations préliminaires pour le Québec, le
Canada et les États-Unis », Notes & Analyses # 11, CÉPÉA, April 2005.
• Linda Lee, Christian Trudeau, and Pierre Martin, « Délocalisation outre
frontière de l’emploi : mise à jour sur l’activité législative aux ÉtatsUnis », Notes & Analyses # 7, CÉPÉA, September 2005.
Please visit our web site and consult our resource page on offshoring
and outsourcing :
www.cepea.umontreal.ca