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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

November 2005: 

Offshoring of Services: 

An Overview of the Issues: 

GAO-06-5: 

GAO Highlights: 

Highlights Of Gao-06-05, A Report To Congressional Committees. 

Why GAO Did This Study: 

Much attention has focused on the “offshoring” of services to lower-
wage locations abroad. Offshoring generally refers to an organization’s 
purchase of goods or services from abroad that were previously produced 
domestically. Extensive public debate has arisen about both the 
potential benefits of services offshoring, such as lower consumer 
prices and higher U.S. productivity, as well as the potential costs, 
such as increased job displacement for selected U.S. workers. 

In response to widespread congressional interest, GAO conducted work 
under the Comptroller General’s authority to help policy makers better 
understand the potential impacts and policy implications of services 
offshoring. This report: 
(1) provides an overview of experts’ views on the potential impacts of 
services offshoring, 
(2) describes the types of policies that have been proposed in response 
to offshoring, and 
(3) highlights some key areas where additional research might help 
advance the debate about offshoring.
In its comments, the department of commerce generally agreed with the 
findings of this report. Commerce, Treasury, and the Office of the 
United States Trade Representative also provided technical comments 
that have been incorporated as appropriate. 

What GAO Found: 

Analysts of the offshoring phenomenon have expressed a range of views 
about the likely impacts of offshoring on four broad areas. The 
differing views reflect several factors: the fact that services 
offshoring is a relatively recent development whose impact is not fully 
known, the limitations of available data on offshoring, and different 
theoretical expectations about how services offshoring will impact the 
U.S. economy. These four areas are: 

* The average U.S. standard of living: Traditional economic theory 
generally predicts that offshoring will benefit U.S. living standards 
in the long run. However, some economists have argued that offshoring 
could harm U.S. long-term living standards under certain scenarios, 
such as if offshoring undermines U.S. technological leadership. 

* Employment and job loss: While economic theory generally predicts 
that offshoring will have little effect on overall U.S. employment 
levels in the long-run, there is widespread recognition that pockets of 
workers will lose jobs due to offshoring, though there is disagreement 
about the expected magnitude of job loss and implications for displaced 
workers. 

* Distribution of income: Some economists maintain that offshoring 
could increase income inequality in the U.S., while others argue that 
changes in the income distribution are driven primarily by factors 
other than offshoring, such as technological change. 

* Security and consumer privacy: Experts express varying degrees of 
concern about the impact of services offshoring on the security of our 
national defense system and critical infrastructure—such as utilities 
and communication networks—as well as the privacy and security of 
consumers’ financial and medical information. 

A wide range of policies has been proposed in response to concerns 
about offshoring and its potential effects. These proposals can be 
categorized into four areas by the concerns they seek to address: (1) 
improving U.S. global competitiveness, (2) addressing effects on the 
U.S. workforce, (3) addressing security concerns, and (4) reducing the 
extent of offshoring. Some analysts have recommended policies in more 
than one area. 

Determining appropriate policy responses to the offshoring phenomenon 
is challenging due to the limited state of knowledge about the extent 
and impacts of offshoring. Nonetheless, there are some key areas where 
additional research might help advance the debate, such as trends in 
the wages and skill levels of jobs being offshored, reemployment 
experiences of workers displaced by offshoring, and the extent to which 
current laws and practices in different sectors of the economy mitigate 
any increased security-related risks posed by offshoring. In the face 
of limited federal data, researchers have begun using a variety of 
approaches to examine such areas. 

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Sigurd Nilsen At (202) 512-7215 Or 
Nilsens@gao.Gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

While Traditional Economic Theory Predicts That Offshoring Will Benefit 
the Overall Economy, Concerns Have Been Raised about Four Areas of 
Potential Impact: 

A Wide Range of Policies Have Been Proposed to Address Concerns about 
Offshoring's Potential Impacts: 

Additional Research in Key Areas May Help Advance the Offshoring Debate: 

Concluding Observations: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: List of Experts Interviewed: 

Appendix III: Comments from the Department of Commerce: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Related Products: 

Bibliography: 

Table: 

Table 1: Some Key Areas for Additional Research on Services Offshoring 
and Possible Approaches for This Research: 

Figures: 

Figure 1: Overall U.S. Trade Balance and Trade Balance in Services: 

Figure 2: Timeline of Legislation Enacted in Response to Trade-Related 
Concerns: 

Figure 3: Four Areas of Potential Impact of Offshoring: 

Figure 4: Real Hourly Wage Growth and Labor Productivity Growth, Wages, 
and Labor Compensation as a Share of National Income: 

Abbreviations: 

BEA: Bureau of Economic Analysis: 

BLS: Bureau of Labor Statistics: 

BPT: business, professional, and technical: 

COTS: commercial off the shelf: 

DOD: Department of Defense: 

GAO: Government Accountability Office: 

IT: information technology: 

MLS: Mass Layoff Statistics: 

TAA: Trade Adjustment Assistance: 

VAT: value-added tax: 

WARN: Worker Adjustment and Retraining Notification: 

WIA: Workforce Investment Act of 1998: 

WTO: World Trade Organization: 

United States Government Accountability Office: 

Washington, DC 20548: 

November 28, 2005: 

Congressional Committees: 

Although "offshoring" has existed for decades in the manufacturing 
sector, recently concerns have been raised about the emergence of 
services offshoring. Offshoring generally refers to the practice, by 
either U.S. companies or government entities, of replacing goods or 
services previously produced domestically with goods and services 
produced abroad. Advances in information technology (IT) and 
developments in the management of business processes, coupled with a 
large pool of educated workers in other countries, allow companies to 
move services work outside of the U.S. as part of a larger trend toward 
global interdependence. For example, U.S. companies are now able to 
move software programming, accounting, or telephone call center 
services to lower-wage locations such as India, the Philippines, and 
Eastern Europe. While U.S. government data have limitations, these data 
indicate that in recent years the imports of services associated with 
offshoring have been growing.[Footnote 1] This has contributed to 
heightened public debate about both the potential benefits of services 
offshoring, such as lower consumer prices and higher U.S. productivity, 
as well as the potential costs, such as increased job displacement for 
U.S. workers. 

Services offshoring raises issues on a wide array of topics, including 
the economy, workforce, consumer privacy, and national security. 
Moreover, various pieces of federal and state legislation have been 
introduced, such as bills to restrict the offshoring of some government 
services or to provide more assistance for displaced workers. In 
response to widespread congressional interest, we have prepared this 
report under the Comptroller General's authority to help the Congress 
understand and examine the potential impacts and policy implications of 
services offshoring. As this report may prove helpful in the 
deliberations of committees with oversight responsibilities or 
jurisdiction over issues raised by offshoring, we have addressed this 
report to these committees. Although this report focuses on services 
offshoring, much of our discussion is applicable to offshoring in the 
manufacturing sector as well. 

This report addresses three broad areas. First, it provides an overview 
of experts' views on the potential effects of offshoring. Where 
possible, we identify empirical research that provides support for 
various views. Where experts express different opinions on the 
potential effects of offshoring, we highlight the key issues that 
underlie the debate. However, the report does not attempt to resolve 
such differences in views. Second, the report provides an overview of 
the various types of policies that have been proposed in response to 
offshoring. We generally categorize policy proposals on the basis of 
the broad concerns that they seek to address, and we provide 
illustrative examples of policies that have been proposed. Third, the 
report highlights some key areas where additional research might 
advance the debate about the effects and policy implications of 
offshoring. Our discussion identifies some relevant data sources and 
potential approaches for such research. 

To carry out this study, we conducted an extensive literature review 
and interviewed a wide range of experts, often with conflicting points 
of view, from academia, government, think tanks, industry groups, and 
labor groups (see app. II for a list of experts interviewed). In 
addition, we attended several conferences to hear presentations on 
services offshoring and dialogue with experts during the course of our 
work. We conducted our review from May 2004 through November 2005 in 
accordance with generally accepted government auditing standards. See 
appendix I for a detailed discussion of our scope and methodology. 

Results in Brief: 

While traditional economic theory predicts that offshoring is likely to 
benefit the overall economy, concerns have been raised about four areas 
of potential impact: on the average U.S. standard of living, employment 
and job loss, income distribution, and security. Observers of 
offshoring have expressed a range of views about the likely impact of 
offshoring on each of these areas. These debates reflect several 
factors: the fact that services offshoring is a relatively recent 
development whose impact is not fully known, the limitations of 
currently available data about the extent of offshoring and its 
impacts, and different theoretical expectations about how services 
offshoring will impact the U.S. economy. 

* Potential impacts on the average U.S. standard of living: Traditional 
economic theory on international trade predicts that in the long run, 
offshoring is likely to be beneficial for the average U.S. standard of 
living; however, some economists have argued that offshoring could harm 
U.S. living standards if it contributes to the erosion of important 
U.S. industries, undermines U.S. technological leadership, or leads to 
a decrease in average U.S. wages. Underlying this debate are different 
predictions about what new areas of comparative advantage the U.S. will 
develop as globalization intensifies--that is, what new goods and 
services will be developed that are produced most efficiently in the 
U.S.--and different assessments about whether offshoring is 
contributing to downward pressure on U.S. wages. 

* Potential impacts on employment and job displacement: Many economists 
agree that offshoring is not likely to affect aggregate U.S. employment 
in the long run but acknowledge that in the short run some workers will 
lose their jobs when employers relocate production abroad. In addition, 
some economists argue that an important effect of offshoring and 
increased trade are structural changes that will generate permanent 
shifts in the types of work conducted by the U.S. labor force. However, 
there is debate about the expected magnitude of job losses related to 
offshoring, the implications of job displacement for those workers who 
are directly affected by it, and the expected direction of any 
structural changes in the labor market caused by offshoring. 

* Potential impacts on distribution of income: There is disagreement 
among economists about whether offshoring is likely to significantly 
affect the distribution of income in the U.S. Some economists have 
expressed concern that offshoring could accelerate income inequality in 
the U.S; however, others argue that changes in the income distribution 
are driven primarily by factors unrelated to offshoring, such as 
technological developments, and still others point out that offshoring 
could potentially decrease income inequality. Underlying these 
disagreements are debates about the extent to which, in the long run, 
offshoring will change the demand for U.S. workers at various income 
and skill levels. 

* Potential impacts on national security and consumer privacy: Experts 
express varying degrees of concern about the impact of services 
offshoring on the security of our national defense system and critical 
infrastructure--systems and structures that are essential to the 
nation, such as utilities and communication networks--as well as the 
privacy and security of consumers' financial and medical information. 
Underlying these debates are unresolved questions about the extent to 
which offshore operations, such as software development or medical 
records processing, pose increased security risks and the extent to 
which current laws and practices mitigate these risks. 

Analysts of the offshoring phenomenon have proposed a broad range of 
policies in response to offshoring, and these proposals represent a 
diverse set of potential directions for public policy in this area. We 
have categorized these proposals into four areas; some analysts have 
recommended policies in more than one area. 

* Proposals to improve U.S. global competitiveness: Many observers view 
offshoring as one aspect of a much broader process of increasing global 
interdependence and propose policies that seek to improve the ability 
of U.S. firms and workers to compete in the global economy. Proponents 
of these policies contend that increased foreign competition signals a 
need for policies to help the U.S. economy strategically develop new 
areas of comparative advantage. Examples of these proposals include 
increasing government support for research and development and 
improving education and training of U.S. workers. 

* Proposals to address effects on the workforce: In response to 
concerns about job displacement due to offshoring, many have proposed 
policies to assist displaced workers who bear the immediate costs of 
offshoring. Some proposals would build on existing programs, such as 
extending the Trade Adjustment Assistance program to dislocated 
services workers. Currently, the program provides workers in the 
manufacturing sector who are dislocated due to trade with extended 
unemployment benefits and subsidized retraining. Other proposals would 
involve broader and more extensive reforms, such as instituting a wage 
insurance program to replace a portion of wages at reemployment for 
workers who experience wage declines after displacement or establishing 
universal or portable health insurance. 

* Proposals to enhance security: Some proposals seek to address 
concerns that offshoring could pose risks to national security, 
critical infrastructure, or the privacy of personal data. These 
proposals can be broadly categorized into two types--those that would 
restrict the type of work that can be sent to foreign locations and 
those that would strengthen requirements governing security and data 
protections. 

* Proposals to reduce the extent of offshoring: Some policy proposals 
address concerns about offshoring by government agencies or the private 
sector by seeking to reduce the extent of offshoring's occurrence. For 
example, some proposals would prohibit or constrain offshoring in 
government procurement. Other proposals seek to modify firms' 
incentives to offshore by altering tax provisions or enhancing 
incentives for firms to locate work in the U.S. 

Determining appropriate policy responses to the offshoring phenomenon 
is especially challenging due to the limited state of knowledge about 
offshoring and its effects. Nonetheless, areas where further research 
might help advance the debate about the impacts and policy implications 
of services offshoring include: 

* impacts of offshoring on various sectors of the U.S. economy, 
particularly sectors that are emerging as new sources of comparative 
advantage; 

* impacts of offshoring on the workforce, such as numbers of workers 
displaced and their reemployment experiences; 

* impacts of offshoring on the U.S. income distribution, including 
trends in wage levels of jobs moving offshore; and: 

* any increased security-related risks posed by offshoring and the 
extent to which these are mitigated by current practices and laws. 

Further research in these areas could help inform policy making by 
providing more information about the nature and magnitude of any 
problems resulting from offshoring. Researchers have begun to use a 
variety of approaches to examine these areas, such as in-depth studies 
of services offshoring in particular industries (e.g., semiconductors 
and radiology) and statistical methods applied to current federal data 
series (e.g., to obtain information on the re-employment experiences of 
workers dislocated due to trade). While these approaches face various 
challenges and limitations, they offer some prospect for additional 
insights on aspects of the services offshoring phenomenon. 

In its comments, the Department of Commerce generally agreed with our 
observations. Commerce stated that it appreciated the thoroughness of 
our review and that the report will be a useful reference starting 
point for discussions of the causes and impacts of offshoring. 
Commerce, Treasury, and the Office of the United States Trade 
Representative also provided technical comments, which we incorporated 
into the report as appropriate. 

Background: 

Defining Offshoring: 

Offshoring generally refers to a company's purchases from abroad 
(imports) of goods or services that were previously produced 
domestically. A company may offshore services either by purchasing 
services from another company based overseas or by obtaining services 
in-house through an affiliate located overseas. For example, a U.S.- 
based company might stop producing parts of its accounting and payroll 
services in-house and instead outsource them to a foreign-based 
company. A U.S.-based multinational company might also offshore by 
moving parts of its accounting and payroll services from its domestic 
operations to its foreign affiliate, thus keeping the services in- 
house. Importing services that had previously been acquired 
domestically or relocating services to foreign affiliates both can 
result in the displacement of U.S. service production and employment, 
though as we discuss later, will likely have other economic effects, 
such as on consumer prices and productivity. 

However, other business activities that do not directly result in the 
displacement of U.S. workers are sometimes included in broader 
definitions of offshoring. Offshoring could include other business 
activities that may result in foregone job creation domestically but 
would not result in job losses. For example, a U.S.-based company might 
expand its accounting and payroll services through a foreign company or 
affiliate, but do so without affecting its U.S. workforce.[Footnote 2] 

Broader definitions of offshoring sometimes include the movement of 
production offshore. This definition of offshoring focuses on U.S. 
companies' investing in overseas affiliates. Offshoring defined in this 
way could but would not necessarily result in the displacement of U.S. 
service production or employment. For example, a U.S.-based company 
investing in its overseas affiliate to produce accounting and payroll 
services to sell to other companies abroad might do so without 
affecting its production and employment levels in the U.S. 

Types of Services Associated with Offshoring: 

Types of services associated with offshoring tend to be those that are 
capable of being performed at a distance and whose product can be 
delivered through relatively new forms of advanced telecommunications. 
Examples of these business functions include software programming and 
design, call center operations, accounting and payroll operations, 
medical records transcription, paralegal services, and software 
research and testing. 

More than three-quarters of U.S. private-sector employees are in 
service-providing industries; however, not all services jobs are likely 
to be at risk from offshoring.[Footnote 3] Many services jobs, such as 
child care providers and hairdressers, require face-to-face contact 
with customers. Other jobs, such as transportation workers, 
construction workers, and auto mechanics, require hands-on contact with 
physical equipment. In addition, some work, such as marketing and 
creative design, may be done more efficiently and productively in close 
proximity to customers and other workers. 

U.S. Trade and Foreign Direct Investment: 

While government data on trade and foreign direct investment offer 
limited insight into the extent of offshoring, the data provide some 
evidence that services imports are growing.[Footnote 4] Trade data from 
the Department of Commerce's Bureau of Economic Analysis (BEA) show 
that imports of services associated with offshoring are growing. For 
example, U.S. imports of business, professional, and technical services 
grew from $20.8 billion in 1997 to $40.7 billion in 2004--an increase 
of about 10% per year.[Footnote 5] It is important to note that these 
import data show that U.S. entities have been purchasing these services 
offshore, but the data do not indicate whether these entities had 
previously been purchasing these services from domestic U.S. sources. 

The U.S., Canada, and the United Kingdom are among the world's leading 
exporters of services. According to World Trade Organization data, the 
U.S. was the world's largest exporter of commercial services in 
2004.[Footnote 6] BEA data show that in 2004 Canada and the United 
Kingdom accounted for 42 percent of the U.S.'s imports of unaffiliated 
business, professional, and technical (BPT) services, or BPT services 
traded between firms that are separate entities from each other. 

The U.S. currently exports more services than it imports and therefore 
maintains a trade surplus in services overall. In 2004, this surplus 
was nearly $48 billion, according to BEA data. However, since 1997, the 
trade surplus in services has generally been shrinking. At the same 
time, the overall trade deficit has generally been expanding (see fig. 
1), though imported services comprise a small share (about 17 percent) 
of total U.S. imports of goods and services. 

Figure 1: Overall U.S. Trade Balance and Trade Balance in Services: 

[See PDF for image] 

[End of figure] 

BEA data on direct investment abroad capture U.S. multinational 
companies' establishment of affiliates abroad, including establishment 
of affiliates to produce services. The data suggest that most services 
produced abroad by U.S. majority-owned foreign affiliates are sold to 
foreign markets rather than to the U.S. In addition, the data show that 
U.S. direct investment abroad tends to be concentrated in other 
developed countries, rather than in developing countries frequently 
associated with services offshoring. For example, according to BEA 
data, 61 percent of U.S. direct investment abroad in 2004 took place in 
the European Union, Canada, and Japan. In the same year, U.S. direct 
investment in developing countries that are frequently cited as 
suppliers of offshore services (e.g., India, the Philippines, Malaysia, 
and China) was relatively small--about 1 percent or less of total U.S. 
direct investments in each case.[Footnote 7] In addition, BEA data from 
2003 show that over nine-tenths of services sold by U.S.-majority-owned 
nonbank foreign affiliates are sold to foreign markets rather than to 
the U.S. 

BEA data also show that the U.S. receives large amounts of direct 
investment by other countries. In 2004, the U.S. received nearly $96 
billion in foreign direct investment. The countries that are the 
largest recipients of U.S. foreign direct investment abroad are also 
the largest foreign direct investors in the U.S., with the European 
Union, Japan, and Canada accounting for 82 percent of foreign direct 
investment in the U.S. Foreign firms investing in the U.S. employ U.S. 
workers. U.S. affiliates of foreign multinational corporations employed 
5.3 million U.S. workers in 2003, accounting for 5 percent of total 
U.S. employment in private industries.[Footnote 8] 

Enabling Factors and Incentives for Offshoring: 

Firms have been offshoring long before the recent trend in services 
offshoring. In previous decades, U.S. manufacturing companies were 
motivated to offshore because of the low costs and availability of 
skilled labor, production and supply networks in some developing 
countries, and reductions in cost of transporting goods. At the same 
time, U.S. companies divided their production processes into discrete 
pieces, which allowed them to offshore some of the components. As a 
result, some businesses offshored total production, and others 
offshored parts of the production process. Firms generally retained 
higher-end, higher-skilled services functions in the U.S., such as 
management, finance, marketing, and research and development. 

Offshoring has recently expanded into services due to three key 
factors. First, technological advances, such as advances in 
telecommunications and the emergence of the Internet, have enabled 
workers in different locations in the world to communicate and be 
connected electronically and has also facilitated the digitization and 
standardization of activities needed to complete business processes. 
These changes in turn have allowed business processes to be divided 
into smaller components, some of which could be done in different 
locations. For example, standardized software has made it possible for 
firms to outsource financial or human resources activities to a 
separate overseas company that performs them for many clients, rather 
than handling the functions internally.[Footnote 9] Thus, in many 
cases, the offshoring of services constitutes an outgrowth of 
outsourcing business functions. Second, countries such as India, China, 
Russia, and much of Eastern Europe have increasingly opened their 
borders to the global economy. Third, other countries have highly 
educated populations with the technical skills for performing services 
and technology-related work. 

According to several business studies, a primary reason that 
organizations engage in offshoring is to reduce costs.[Footnote 10] The 
cost savings from offshoring are primarily the result of differences 
between the U.S. and developing countries in the unit cost of labor, 
the worker compensation (wages and benefits) that must be paid to 
produce one unit of goods or services. Unit labor costs are lower for 
certain services in developing countries primarily because workers' 
wages in those countries are lower than in the U.S. However, unit labor 
costs also depend upon the productivity levels of workers. Although 
labor costs in a developing country may be lower than in the U.S., it 
may still be possible for the unit cost of labor to be lower in the 
U.S. than the other country if U.S. workers' productivity is much 
higher, meaning than the U.S. worker can produce many more or higher 
quality products within a certain time frame than a worker in the other 
country. Differences in unit labor costs can also result from 
differences in costs of employee benefits, such as health care and 
pension benefits. In addition, cost savings can be affected by currency 
exchange rates, countries' tax policies, and government-provided 
incentives such as tax rebates. 

Aside from cost savings, firms may have other incentives to offshore. 
Access to a workforce in different time zones across the globe may 
enable companies to conduct work around the clock and consequently meet 
worldwide customer needs. Establishing a presence in foreign countries 
can provide companies access to overseas markets. In addition, 
offshoring non-core services can enable companies to focus their 
resources on their core functions. By outsourcing non-core functions to 
overseas firms that specialize in them, businesses may also experience 
improvements in the quality of these functions. 

Although firms may have many incentives to offshore, they may also face 
disincentives to offshore. Offshoring has several costs associated with 
it, including costs to start up an offshore operation and to manage and 
train an offshore workforce. In addition, some experts have noted that 
wages of workers in developing countries are rising more rapidly than 
U.S. wages, therefore shrinking the cost savings of offshoring over 
time.[Footnote 11] Furthermore, offshoring carries potential risks, 
such as possible political instability in overseas locations, less 
reliable civil infrastructure, exchange rate volatility, less developed 
legal and regulatory systems, and risks to intellectual property. 

Legislation Enacted in Response to Trade-Related Concerns: 

In the last few decades, the Congress has enacted various pieces of 
legislation related to trade and increasing global interdependence, 
primarily due to concerns about their effects on the manufacturing 
sector. (See fig. 2.)[Footnote 12] This legislation sought to expand 
U.S. exports; establish fair trading practices; assist workers, firms, 
and communities adversely affected by trade; and improve U.S. 
competitiveness through support for education and research and 
development. For example, trade acts of 1962, 1974, and 1979 sought to 
expand U.S. exports by establishing mechanisms for negotiating and 
entering into trade agreements. The trade acts also established 
remedies for industries hurt by import competition through unfair trade 
practices. The Trade Act of 1974, as amended, established a trade 
adjustment assistance program to provide financial assistance and 
retraining to workers involved in the manufacturing of articles who 
lost their jobs due to foreign competition. In addition, the act also 
established a program that enabled manufacturing firms and communities 
hurt by trade to receive technical assistance and financial support to 
develop new strategies to improve their competitiveness. Congress 
enacted various other legislation to enhance the competitiveness of the 
U.S. economy by improving education and supporting research and 
development. Among others, these included the Stevenson-Wydler 
Technology Innovation Act of 1980, which authorized the creation of 
various technology centers. With regard to services specifically, the 
Trade and Tariff Act of 1984 required the Commerce Department to 
establish a program on international trade in services and to issue a 
report every 2 years.[Footnote 13] In addition, the Omnibus Trade and 
Competitiveness Act of 1988 directs the Secretary of Commerce to 
conduct a benchmark survey of services transactions. 

Figure 2: Timeline of Legislation Enacted in Response to Trade-Related 
Concerns: 

[See PDF for image] 

[End of figure] 

Aside from these laws, other legislation enacted by the Congress may 
address some concerns raised by trade and globalization. For example, 
under the Workforce Investment Act of 1998 (WIA), the Department of 
Labor oversees an employment and training system operated by states and 
localities to assist displaced workers in obtaining new jobs, which 
could include workers who become displaced due to trade-related 
reasons.[Footnote 14] WIA funds may also be used to provide training 
for employed workers to upgrade their skills. 

While Traditional Economic Theory Predicts That Offshoring Will Benefit 
the Overall Economy, Concerns Have Been Raised about Four Areas of 
Potential Impact: 

Traditional economic theory predicts that expansion of international 
trade, including offshoring, will have beneficial effects on the U.S. 
economy, but a number of concerns have also been raised about the 
potential economic and social impacts of offshoring. We have identified 
four areas of concern about the potential impacts of offshoring: 
potential impacts on the average U.S. standard of living, including 
average wages; employment and job displacement among American workers; 
the distribution of income; and national security and consumer privacy. 
Economists and other policy analysts have expressed in literature and 
in interviews with us a range of views about the likely impacts of 
offshoring on each of these areas. This diversity of views reflects 
several factors: the fact that services offshoring is a relatively 
recent development in international trade whose impact is not yet fully 
known; the limitations of currently available data about the extent of 
offshoring and its impacts; and different theoretical expectations 
about the likely impact of expanded trade in services on the U.S. 
economy. The issues identified in this section may not be exhaustive; 
others may raise concerns about offshoring that are not discussed in 
this report. Figure 3 summarizes experts' different views about the 
four areas of potential impact for the U.S. that we identify. 

Figure 3: Four Areas of Potential Impact of Offshoring: 

[See PDF for image] 

[End of figure] 

Potential Impacts on the Average U.S. Standard of Living: 

Traditional economic theory on international trade predicts that 
offshoring is likely to be beneficial for the average U.S. standard of 
living in the long run; however, some economists have argued that 
offshoring could harm U.S. living standards. Economists who contend 
that offshoring will increase average U.S. living standards expect that 
it will do so through raising productivity (and thereby increasing 
national income), increasing average wages for American workers, and 
providing consumers with lower prices and access to a broader range of 
goods and services.[Footnote 15] In addition, they expect that U.S. 
companies will respond to the challenges of international competition 
by developing new areas of specialization in the global economy. 
Economists who argue that offshoring may lower U.S. average living 
standards focus on the possibility that offshoring may contribute to a 
decline in the strength of some U.S. industries and may threaten U.S. 
leadership in innovation and technological development. Some economists 
also focus on the possibility that offshoring may lead to downward 
pressure on U.S. wages even if it has positive effects on the U.S. 
economy overall. Underlying these disagreements are different 
predictions about what areas will emerge as new sources of comparative 
advantage in the global economy, as well as different assessments about 
whether offshoring is contributing to downward pressure on U.S. wages. 

Traditional Economic Theory Predicts that Offshoring Will Benefit 
Average U.S. Living Standards in the Long Run: 

Effects on Productivity: Offshoring of services represents an expansion 
of trade into sectors of the economy that in the past were relatively 
untraded; as such, many economists we interviewed or who have published 
literature on offshoring expect offshoring to increase productivity in 
these sectors. Offshoring is expected to lead to productivity increases 
through several mechanisms. First, increased competition could lead to 
pressures for greater efficiency, causing least productive firms to 
exit the market so that firms that remain in the market are 
increasingly focused on managing for greatest productivity. Second, 
offshoring--like domestic outsourcing--could enable U.S. firms to 
specialize in the core functions in which they add the greatest value, 
while moving lower-value job functions out of the country. As U.S. 
firms reallocate resources toward higher-value activities, moving lower-
value activities overseas, the U.S. economy overall could see 
productivity gains. Third, offshoring could enhance productivity by 
promoting reductions in the costs of technology and other inputs that 
improve the efficiency of business processes. For example, some 
economists have argued that offshoring of IT services will reduce the 
cost of these services, making IT-enabled products and services more 
affordable and leading to increased diffusion of productivity-enhancing 
technology throughout many industries.[Footnote 16] For instance, the 
lower cost of offshored health-record transcription services might 
encourage more health care providers to keep digitized medical records, 
improving the efficiency and productivity of the health care industry. 

Because the acceleration in services offshoring is a relatively recent 
phenomenon, empirical evidence about its effects on the productivity of 
the U.S. economy remains preliminary. However, the effects of 
offshoring in manufacturing have been observed over many years and can 
shed some light on the potential impact of services offshoring on U.S. 
productivity. A number of research studies suggest that offshore 
outsourcing contributed to productivity improvements in U.S. 
manufacturing. Catherine Mann, among others, has argued that offshoring 
in the production of computer hardware--along with domestic innovation-
-kept prices of new hardware low and thereby played a role in the 
deepening of IT investment throughout the U.S. during the 1980s and 
1990s.[Footnote 17] Since the mid-1990s, the U.S. has experienced a 
period of unusually rapid productivity growth, which many attribute to 
accelerating investment in IT and the rapid diffusion of new 
applications and uses that occurred in the 1980s and 1990s.[Footnote 18] 

New Areas of Comparative Advantage: Traditional economic theory also 
predicts that increased trade--including offshoring--will increase 
economic growth, and therefore average living standards in the long 
run, by driving the economy to develop new innovative and high-value 
areas of comparative advantage--that is, to specialize in the creation 
of high-value goods and services that are produced most efficiently in 
the U.S.[Footnote 19] Although increased competition due to offshoring 
and other trade may lead to contraction of production and employment 
within some U.S. industries, trade is also expected to reallocate the 
resources of the U.S. economy to sectors that are comparatively more 
efficient, such that U.S. companies are expected to eventually develop 
new areas of comparative advantage in the global economy that will lead 
to continued economic growth. Some economists contend that advantages 
that the U.S. has over less developed countries, such as a relatively 
high-skilled workforce, abundance of capital, and well-developed 
financial markets and investment opportunities will enable the U.S. 
economy to specialize in higher-value work. In particular, they expect 
that offshoring will contribute to the reduction or elimination of 
certain lower-skilled occupations in the U.S., but lead to the creation 
of new jobs in occupations that require higher levels of skill, 
shifting U.S. production and the distribution of employment to fields 
with higher returns.[Footnote 20] 

Some empirical studies suggest that the U.S. economy has historically 
developed new high-value areas of comparative advantage as trade has 
increased. The process of the U.S. developing higher-value areas of 
comparative advantage as lower-value work is moved offshore has been 
observed over many years in some manufacturing industries. For example, 
in the semiconductor industry, assembly work that was originally 
conducted in the U.S. began to be moved offshore in the 1960s. Although 
this offshoring did lead to job losses in the U.S., economists Clair 
Brown and Greg Linden assert in their research that this movement also 
kept the U.S. semiconductor industry competitive and permitted the U.S. 
industry to specialize in higher-value work within the industry. 
According to Brown and Linden, as chip assembly moved offshore, U.S. 
firms specialized in higher-value fabrication work, and when 
fabrication work began to move offshore, U.S. firms specialized in 
design.[Footnote 21] Offshoring of services has not been occurring long 
enough to observe the relationship between offshoring and the emergence 
of new areas of specialization; however, economists J. Bradford Jensen 
and Lori Kletzer have argued that recent data demonstrates that workers 
in industries and occupations that are more likely to be affected by 
international trade tend to have higher wages and higher skills than 
workers in "non-tradable" service sector jobs, which is consistent with 
the hypothesis that offshoring and globalization is leading the U.S. 
economy to specialize in higher-value work.[Footnote 22] Historical 
trends also suggest that openness to trade has increased the economy's 
aggregate output in the past. The U.S. economy has grown as trade has 
expanded, and internationally, there is some evidence that countries 
that are more open to trade typically experience faster growth than 
those that are more closed.[Footnote 23] 

Effects on Wages: Some economists also argue that offshoring could 
increase average living standards by contributing to growth in average 
real wages for U.S. workers, corresponding to offshoring's effects on 
productivity. Economic theory predicts that average real wages should 
typically rise with average productivity rates, as workers are 
compensated for producing more per hour of work. Wages are expected to 
move with productivity growth in the long run if the share of national 
income that accrues to workers versus the share that accrues to firms' 
profits and other income remains fairly constant. Historically, wage 
growth in the U.S. has broadly tracked productivity growth, although 
changes in wages and productivity may have diverged for periods of time 
(see fig. 4). During the post-World War II period, the share of 
national income spent on total compensation--wages and benefits--rose 
throughout the 1950s, 1960s, and 1970s, and has been fairly constant 
since 1980, averaging about 66 percent of national income, with the 
remainder accruing to corporate profits, proprietor's income, rental 
income, and net interest.[Footnote 24] Since 1970, an increasing amount 
of total labor compensation has been spent on benefits rather than 
wages and salaries. In recent years--since the end of the 2001 
recession--wages have not moved up with productivity growth, and total 
labor compensation as a share of national income has declined somewhat, 
from 66 percent in 2001 to 64 percent in 2004. During this time, wages 
and salaries as a share of national income declined from 55 percent in 
2001 to 52 percent in 2004. Some economists have argued that this 
divergence of compensation growth from productivity growth is 
problematic and runs counter to assertions that increased productivity 
gains from offshoring will necessarily raise average living standards; 
however, this fluctuation is considered by other economists to fall 
within recent norms. 

Figure 4: Real Hourly Wage Growth and Labor Productivity Growth, Wages, 
and Labor Compensation as a Share of National Income: 

[See PDF for image] 

Note: Total compensation includes wages and salaries, plus employers' 
contributions for employee pension and insurance funds and government 
social insurance. Productivity growth and hourly compensation growth 
are both obtained from the Bureau of Labor Statistics' (BLS) 
"Productivity and Costs" data series. Both of these measures are highly 
cyclical and have therefore been averaged over each business cycle 
(peak to peak) in order to more easily show trends over time. 
Productivity growth is seasonally adjusted nonfarm business output per 
hour. Hourly compensation includes wages and salaries of employees plus 
employers' contributions for social insurance and private benefit 
plans. Except for nonfinancial corporations, where there are no self- 
employed, data also include an estimate of wages, salaries, and 
supplemental payments for the self-employed. Hourly compensation growth 
is deflated in recent quarters based on the Consumer Price Index for 
all urban consumers (CPI-U). The trend from 1978-2004 is based on the 
Consumer Price Index research series (CPI-U-RS). 

[End of figure] 

Effects on Prices and Availability of Consumer Goods and Services: 
Traditional economic theory also predicts that offshoring will improve 
average U.S. living standards by lowering consumer prices and providing 
consumers access to a wider range of goods and services than would 
otherwise be available. Many economists expect that competition will 
lead companies to pass the cost savings from offshoring onto consumers 
in the form of lower prices. However, economic theory also predicts 
that the extent to which cost savings are passed onto consumers depends 
on how competitive the market is for particular goods and services. 
While firms in highly competitive markets are likely to pass most of 
the cost savings from offshoring through to the purchasers of the 
service, in less competitive markets, economic theory predicts that 
firms may retain some or all of the cost savings.[Footnote 25] 

Some Economists Have Argued That Offshoring Could Negatively Impact 
U.S. Living Standards: 

Although the most commonly cited economic trade theories predict that 
offshoring will likely have positive effects on the average U.S. living 
standard, some trade models generate scenarios under which the U.S. 
could lose either its absolute or relative position in the global 
economy, and some economists have argued that services offshoring is 
better described by these latter types of economic models.[Footnote 26] 
Models in which the U.S. could face potential losses from increased 
trade such as offshoring reflect the possibility that as our trading 
partners become more productive in creating goods and services that the 
U.S. specializes in, the economic position of the U.S. could be 
undermined. For example, Ralph Gomory and William Baumol have described 
scenarios in which a trading partner experiences productivity 
improvements in an important U.S. export industry, resulting in 
declines in U.S. national income because U.S. firms lose their position 
as the most competitive producers in the industry.[Footnote 27] The 
impact on the U.S. workforce, in this model, is particularly 
detrimental if the industry in which the U.S. is challenged is highly 
profitable and pays high wages, such as industries in which the U.S. 
has long held technological superiority or an industry that is 
difficult to enter.[Footnote 28] Other economists have developed 
different models in which productivity changes abroad lead to losses in 
the absolute or relative position of the U.S. in the global 
economy.[Footnote 29] The negative results of increased trade in these 
models are not specific to offshoring--they could result from other 
forms of trade too, but they are sometimes cited when concerns about 
offshoring are raised because services offshoring raises the specter of 
the movement of high-value work from the U.S. to foreign trading 
partners. 

Some have raised concerns that offshoring poses risks to U.S. 
leadership in innovation, particularly in high-value areas such as 
technology fields and research and development, raising the possibility 
that the global economic position of the U.S. could be eroded over 
time.[Footnote 30] Economists and other offshoring observers have 
suggested a range of mechanisms through which offshoring could have a 
negative impact on U.S. innovation. Some argue that innovation results 
from solving technical problems during manufacturing, design, and 
research and development. To the extent that this work is conducted 
overseas, offshoring could promote faster technological diffusion to 
foreign firms, which may over time lead to foreign competitors coming 
to dominate an industry in which the U.S. was once the technological 
leader. Some contend that offshoring portions of the research and 
development infrastructure could threaten U.S. technological leadership 
by disrupting important innovation networks in the U.S., such as the IT 
cluster in Silicon Valley in California, or the biotechnology cluster 
in Cambridge, Massachusetts, and promoting the emergence of such 
networks abroad. In addition, some express concern that offshoring 
routine or entry-level work in some technical industries could hurt the 
U.S.'s ability to maintain an innovative workforce by closing off 
career prospects for some U.S. workers and discouraging U.S. students 
from entering those fields. 

Another concern raised by some economists is that offshoring could 
reduce average living standards for American workers by slowing the 
growth of average wages. These economists raise the concern that even 
if offshoring promotes economic growth and productivity, it could 
decrease labor's share of national income by subjecting American 
workers to direct competition with foreign workers, leading to slower 
growth or even a decline in average wages.[Footnote 31] As we 
previously noted, recent statistics show a dip in the share of national 
income accruing to total worker compensation in recent years, and some 
economists believe that offshoring may be contributing to this trend. 

Finally, some question whether firms will use the cost savings from 
offshoring in ways that lead immediately to the productivity 
improvements and consumer price reductions predicted by trade 
theory.[Footnote 32] Under certain market conditions, an individual 
firm could retain supernormal profits (profits above the usual for 
their particular industry and product) for a period of time, 
distributing these gains to shareholders or their remaining employees, 
rather than passing on cost savings to consumers in the form of price 
reductions or investing their cost savings in productivity-enhancing 
reorganization or new technology. Although economic theory predicts 
that under many market conditions competitive forces will constrain the 
ability of firms to earn supernormal profits on an ongoing basis, the 
assumption that individual firms face perfectly competitive market 
conditions may not necessarily be accurate. Thus, some offshoring 
experts stress the importance of examining firm-level decisions to 
determine whether, how, and how quickly offshoring leads to price 
reductions and the reorganization of firms and industries toward 
specialization in higher-productivity activity. 

Underlying the debate about the effects of offshoring on the average 
U.S. standard of living are different perspectives on the following 
questions: 

* What new areas of comparative advantage will the U.S. economy develop 
to compensate for declines, if any, in areas threatened by offshoring? 

* How will offshoring affect average U.S. wages? Will the possible 
benefits of productivity gains offset the possible downward pressure 
exerted by increased exposure of U.S. workers to global competition? 

Potential Impacts on Employment and Job Displacement: 

Many economists agree that offshoring is not likely to affect aggregate 
U.S. employment in the long run, but acknowledge that in the short run, 
workers will lose their jobs when employers relocate production abroad. 
At the same time, some economists have commented that offshoring may 
cause structural changes in the labor market because increased trade 
alters the mix of goods and services produced in the U.S. These 
structural changes could generate permanent changes in the types of 
work conducted by the U.S. labor force and could also possibly have 
longer-term effects on the U.S. unemployment rate. There is 
disagreement about the expected direction of any structural changes in 
the labor market due to offshoring, the expected magnitude of job 
displacement due to offshoring, and the implications of this 
displacement for those workers who are directly affected by it. 
Underlying these disagreements are different estimates about the 
projected extent of job losses due to offshoring, which types of jobs 
will be offshored, which areas of the economy will generate growth in 
job opportunities, and the re-employment experiences of workers whose 
jobs are offshored. 

Many Economists Expect Offshoring to Have Little Effect on Long-Run 
Aggregate Employment, but Expect It to Have Effects on the Structure of 
Employment: 

Economic theory predicts that expansions in trade, including 
offshoring, typically should not affect the overall employment level 
(net employment) in the U.S. in the long run. Some economists argue 
that the U.S. labor market is generally expected to adjust quickly to 
changes in economic conditions because new jobs will be created as jobs 
are lost, and as a result, those who lose their jobs due to economic 
changes such as offshoring are expected to readily find new work. Given 
a flexible labor market, these economists theorize that the primary 
determinant of fluctuations in the employment rate is aggregate demand 
in the overall economy, observed in the business cycle.[Footnote 33] 

Historically, the U.S. economy has rarely experienced unemployment 
rates higher than 10 percent of the labor force, with the exception of 
unique periods such as the Great Depression.[Footnote 34] According to 
Bureau of Labor Statistics (BLS) data, since 1947, the civilian 
employment rate has increased gradually from around 59 percent in the 
1940s and 1950s, to an average of 66 percent over the past 20 
years.[Footnote 35] During this period, the unemployment rate has 
generally fluctuated between about 4 percent to 8 percent, averaging 
5.6 percent per year, even though the U.S. labor force has grown by, on 
average, 1.4 million people per year. Furthermore, the U.S. employment 
rate has not been correlated with trade or imports. While traded goods 
and services have increased from about 4 percent of the gross domestic 
product (GDP) to about 14 percent of GDP over the past 60 years, 
employment rates have steadily increased.[Footnote 36] Even shocks to 
the percentage of the economy that is open to trade, such as the 
passage of major trade agreements, have not been correlated with 
significant changes in employment rates. Some have argued that while 
balanced trade may not affect employment levels, large and continued 
trade deficits put American jobs at risk. Historically, however, 
although employment in certain sectors of the economy is sensitive to 
trade balances, there has been no evidence of a correlation between 
trade deficits and overall employment.[Footnote 37] 

Although there is dispute over the number of jobs likely to be lost due 
to offshoring in years to come, even the larger estimates generally 
represent a small enough fraction of the total number of jobs destroyed 
and created in the U.S. that many believe the U.S. labor market is 
likely to be able to absorb the change. For example, some private 
sector studies estimate that between 100,000 to 500,000 information 
technology jobs will be displaced over the next few years, and 
potentially several million jobs across all occupations could shift 
outside the U.S. over the next decade.[Footnote 38] Several economists 
have pointed out that even the larger job loss estimates represent a 
relatively small percentage of the total number of jobs destroyed and 
created annually in the U.S. According to BLS statistics, since the end 
of the last recession in the fourth quarter of 2001, the U.S. has shed 
an average of 7.64 million jobs per quarter, while creating an average 
of 7.77 million jobs per quarter. Viewed in this context, some note 
that estimates of the number of jobs that could be lost due to 
offshoring do not appear to be as large of a shock to the economy. 
Moreover, some maintain that job losses due to offshoring should also 
be viewed in the context of the two-way flow of trade. Jobs are created 
as a result of U.S. firms exporting goods and services to other 
countries and foreign firms locating their production in the U.S. 
through direct foreign investment. 

Although some economists argue that trade, including offshoring, is 
unlikely to affect long-term employment rates, others have noted that 
increases in offshoring and globalization could lead to changes in the 
structure of employment, which could lead to changes in the number of 
jobs available in different occupations and industries and could also 
potentially increase unemployment. Structural changes to employment 
involve the permanent reallocation of workers and resources throughout 
the economy.[Footnote 39] Offshoring could contribute to structural 
changes in employment by changing employers' demand for different skill-
sets and occupations within certain industries. For example, offshoring 
could lead to substantial reductions in low-skilled IT-based services 
work while generating increases in high-skilled work such as IT systems 
management. It may take a long time for the economy to replace jobs 
lost to structural changes with new jobs because workers must switch 
industries, locations, or skills in order to find re- employment and 
because employers must create new jobs.[Footnote 40] Although the 
workforce should eventually adjust to the structural changes in the 
economy, a significant structural change could potentially lead to an 
increase in unemployment in the meantime.[Footnote 41] 

Regardless of the impact of offshoring on aggregate employment and the 
unemployment rate, many economists acknowledge that offshoring and 
increased trade could produce structural changes that could generate 
permanent shifts within the U.S. labor market. Some economists believe 
these structural changes will lead to the U.S. workforce gaining better 
jobs overall, as U.S. businesses respond to offshoring and 
globalization by creating jobs in new areas of specialization that 
capitalize on the relatively highly skilled workforce and abundance of 
capital of the U.S. economy. For example, some note that while the U.S. 
has lost significant numbers of computer programming jobs, potentially 
due to offshoring, the U.S. economy at the same time has experienced an 
increase in the number of more sophisticated computer-related 
occupations, such as computer software engineers.[Footnote 42] Other 
economists suggest that structural changes could lead to lower-quality 
jobs if the U.S. develops comparative advantage in areas that primarily 
produce low-skilled jobs. 

Research has been done on the extent to which job gains and losses in 
recent years have resulted from structural changes in the economy; 
however, this research does not indicate whether the structural changes 
were due to offshoring. For example, in their study of the recent U.S. 
labor market, Erica Groshen and Simon Potter found evidence of 
structural change following the end of the 2001 recession, although 
they did not investigate whether offshoring was a cause of the 
structural change.[Footnote 43] 

There is Widespread Recognition That Offshoring Will Cause Some Job 
Displacement but Considerable Disagreement about the Expected Magnitude 
of This Problem: 

Although many economists believe that aggregate employment will not be 
significantly affected by offshoring, there is widespread recognition 
that offshoring may nevertheless displace at least some workers from 
their jobs, leading to adjustment costs incurred by these workers and 
their families as they seek re-employment. In other words, although net 
job loss due to offshoring may be minimal, with losses in some 
industries and occupations offset by employment growth in other areas, 
gross job losses due to offshoring could be significant. 

Limited data make it difficult to draw conclusions about the current 
extent of job loss due to offshoring. The data limitations have led to 
conflicting claims, with some arguing that offshoring is a minor 
phenomenon and others arguing that it is being underestimated. For 
example, some cite data from the Mass Layoff Statistics (MLS) program 
produced by the Bureau of Labor Statistics, which showed that about 
16,000 manufacturing and services job separations--less than 3 percent 
of the nonseasonal mass layoffs that took place in 2004--resulted from 
"movement of work" to locations outside the U.S. However, the MLS 
undercounts total job separations due to offshoring because it is 
designed to capture only mass layoffs, not total layoffs.[Footnote 44] 
In contrast, others cite privately collected data that suggests that 
the extent of offshoring is much greater. For example, some have cited 
data collected by Kate Bronfenbrenner and Stephanie Luce, who attempted 
to measure the extent of offshoring with data collection from media 
reports and other sources. Extrapolating from a three month period, 
they estimate that as many as 406,000 manufacturing and services jobs 
were shifted from the U.S. to other countries in 2004.[Footnote 45] 

Although there is considerable uncertainty about the number of jobs 
that have been lost due to offshoring, a number of economists expect 
that offshoring is likely to expand in the future, both in absolute 
numbers and in types of work. For example, Cynthia Kroll has estimated 
that nearly 15 million people, or 12 percent of the employed labor 
force, are in white-collar occupations at risk to offshoring, though 
she notes that not all jobs in these occupations are likely to be 
offshored.[Footnote 46] Private sector studies have also attempted to 
create forecasts of the effects of offshoring on employment in "at- 
risk" occupations; some of these studies project that between 100,000 
and 500,000 IT jobs will be displaced within the next few years, and 
potentially several million jobs across all occupations will shift 
outside the U.S. over the next decade.[Footnote 47] However, these 
studies face challenges in estimating the effects of offshoring because 
they are often based on federal statistics that currently provide 
limited information on the level and effects of offshoring. 

Some economists have expressed concerns about the potential size of the 
dislocation costs for workers who lose their jobs due to offshoring, 
based in part on the experiences of manufacturing workers whose jobs 
were lost due to trade; others argue that the costs of displacement 
might not be as large for services workers as they have been for 
manufacturing workers. Dislocation costs that workers could potentially 
experience include lost income during their period of unemployment and 
a lifetime of reduced wages if they cannot find a job that pays as much 
as the job they lost. Dislocation costs could be higher if job losses 
are concentrated in geographic areas because it may be difficult for 
the regional economy to absorb so many job seekers quickly and the 
local real estate market could be impacted.[Footnote 48] Research on 
workers dislocated from jobs in manufacturing industries that faced 
import competition suggests that workers who lose their jobs due to 
trade-related employment changes tend to be less likely to find 
reemployment and to face larger income declines after job displacement 
than workers displaced from industries that are less trade-sensitive. 
However, some have raised questions about whether these results are 
applicable to trade-impacted services workers, who tend to have more 
desirable labor market characteristics than manufacturing workers. 
Research by J. Bradford Jensen and Lori Kletzer suggests that in recent 
years, services workers displaced from "tradable jobs"--jobs in 
industries and occupations likely to be affected by trade--had labor 
market advantages over those displaced from "non-tradable" service 
sector jobs and from manufacturing jobs, such as more education and 
higher predisplacement earnings.[Footnote 49] Re-employment rates were 
slightly higher for displaced service sector workers in tradable jobs, 
compared to those in non-tradable jobs, and were significantly higher 
than the reemployment rates for displaced manufacturing workers. 
Earnings losses were significant for displaced services workers in 
tradable jobs, however. Of those re-employed, 55 percent experienced a 
decrease in earnings, with the average re-employed worker experiencing 
a 30 percent decline in earnings after reemployment. These large losses 
reflect the fact that displaced services workers in tradable jobs 
tended to have had relatively high wages prior to displacement. 

Underlying the debate about the effects of offshoring on employment and 
job displacement are different perspectives on the following questions: 

* Will offshoring contribute to structural changes in U.S. employment, 
and how will these changes affect aggregate employment levels and the 
type of occupations available to U.S. workers? 

* How many workers will be displaced due to offshoring? 

* What are the reemployment experiences of workers dislocated due to 
offshoring? 

Potential Impacts on the Distribution of Income: 

Some economists have expressed concern that offshoring could accelerate 
income inequality in the U.S; however, others argue that changes in the 
income distribution are driven primarily by factors unrelated to 
offshoring, and still others point out that offshoring could 
potentially decrease income inequality. Those who think offshoring 
might accelerate income inequality believe it could do so by lowering 
the wages of some lower-wage and middle-class jobs, while potentially 
increasing the wages of smaller numbers of highly compensated 
positions. Those who disagree argue that offshoring is unlikely to have 
significant effects on wages and the U.S. income distribution because 
changes in demand for different skills are driven more by technological 
developments than by the changing international division of labor. 
Those who argue that offshoring could reduce income inequality note 
that this could occur if offshoring generates wage pressure on high- 
wage jobs, such as engineering, without significantly affecting the 
wages of low-wage jobs. Offshoring could also reduce income inequality 
if it reduces the cost of services that are consumed by primarily lower-
and middle-income Americans. Underlying these disagreements are debates 
about whether, in the long run, offshoring will change the demand for 
U.S. workers with different skill levels, which sectors of the income 
distribution are most likely to be affected by this changing demand, 
and whether offshoring leads to reductions in the cost of services that 
primarily benefit lower-and middle-income Americans. 

Some Economists Expect That Offshoring Could Affect the Distribution of 
Wage Income among U.S. Workers: 

Because offshoring is expected to have effects on the structure of 
employment within the national economy, it is expected to affect the 
distribution of income in the U.S; however, experts hold differing 
views about the direction of these effects. Some contend that 
offshoring will increase income inequality and note several possible 
ways that it could do so. First, offshoring could increase income 
inequality if it primarily led to job losses or wage reductions among 
relatively low-income workers but had less of an effect on the jobs or 
wages of middle-and higher-income workers. Some offshoring observers 
argue that offshoring in the service sector has thus far primarily 
affected lower-wage jobs, such as call-center work and office support 
functions, rather than middle-or higher-income jobs. Second, some 
economists and policy analysts have expressed concern that offshoring 
could reduce wages at the middle of the income distribution and lead to 
a "hollowing out" of the middle class if it is primarily middle-income 
jobs that are moved offshore or experience wage declines. For example, 
some economists and other policy analysts have noted that sophisticated 
and well-paid job functions, such as computer programming and radiology 
analysis, are increasingly susceptible to offshoring. In addition, some 
contend that offshoring will lead to increased inequality by 
contributing to income growth among those at the high-end of the income 
distribution. For example, an increase in corporate profits resulting 
from offshoring may promote growth in high-wage managerial positions 
and income accruing to business owners. 

However, some economists contend that offshoring could also reduce 
income inequality if it leads to job losses or reduced wages among 
higher-wage occupations, such as engineering, without significantly 
affecting the jobs and wages of low-wage workers. In addition, some 
argue that offshoring could reduce inequality if it led to a decline in 
the wages, and consequently fees charged, by highly compensated workers 
who provide services to lower-and middle-income households. For 
example, if offshoring puts downward pressure on the wages of 
accountants, the resulting decrease in the cost of accounting services 
represents an increase in real wages for lower-and middle-income 
households who use these services, reducing inequality. 

Trade theory can provide a rationale for those who have noted that 
offshoring could lead to increasing income inequality. One of the most 
commonly cited models, the Heckscher-Ohlin model, predicts that when 
the U.S. initiates or expands trade with a country that has a 
dissimilar workforce, such as a developing country, this trade is 
likely to have a negative effect on the distribution of wage income 
within the U.S. workforce.[Footnote 50] For example, when trade expands 
between the U.S., a country with a large pool of highly-skilled and 
educated workers, and a developing country with a large pool of less 
skilled and educated workers, this model generally predicts that the 
U.S. will specialize in those goods and services that are best produced 
by more skilled and educated workers, while the developing country will 
specialize in those goods and services best produced by less skilled 
and less educated workers. The implication of this international 
specialization for U.S. workers is that demand for skilled workers in 
the U.S. will grow, while demand for less skilled workers in the U.S. 
will shrink. As a result, wages for more skilled and educated U.S. 
workers will increase relative to the wages of less skilled and 
educated U.S. workers, thus increasing income inequality. However, to 
the extent that services offshoring involves the movement of higher- 
skilled work to developing countries, more complex versions of this 
model generate different predictions about income inequality in the 
U.S.--income inequality could decline if the demand for higher-skilled 
workers declines relative to the demand for lower-skilled 
workers.[Footnote 51] 

Although many economists agree that international trade, including 
offshoring, could have some impact on the distribution of income, some 
argue that these factors are not among the more important determinants 
of the U.S. income distribution. These economists argue that other 
factors are much more significant determinants of the changing U.S. 
income distribution. In particular, technological change is viewed by 
some economists as the primary determinant of the growing wage gap 
between more and less skilled workers. Many economists claim that as 
technological advances have occurred, particularly in computers and IT, 
requirements for technological skills for workers across a range of 
occupations have increased, requirements that often translate into 
increased demand for more educated workers. At the same time, 
technological advances have permitted some routine work to be 
automated, decreasing demand for less-skilled workers. Numerous studies 
have examined whether trade or technological change explained a larger 
share of the growing wage gap between more and less educated workers 
during the 1980s and 1990s, with the majority concluding that 
technological change was a more important determinant than 
trade.[Footnote 52] On balance, these studies conclude that trade has 
made a small contribution to the increase in income inequality. 
Estimates suggest that trade explains between 10 and 20 percent of the 
increase in income inequality, with the majority of the increase 
attributable to other factors such as technological change that favors 
higher-skilled workers. However, the impact of services offshoring on 
income inequality has not been examined to the same extent that 
manufacturing trade has. 

Underlying the debate about the effects of offshoring on U.S. income 
distribution are different perspectives on the following questions: 

* What are the characteristics (occupation, skill level, and wages) of 
jobs that are moving offshore? 

* What are the characteristics of jobs that are being created? 

* Will offshoring reduce the cost of goods and services that are 
important consumption items for middle and lower income households? 

Potential Impacts on Security: 

Experts express varying degrees of concern that offshoring could pose 
security risks, including increased risks to national security, 
critical infrastructure, and personal privacy. Underlying these 
disagreements are unresolved questions about the extent to which 
offshore operations pose additional risks than outsourcing services 
domestically and the extent to which U.S. laws and standards apply and 
are enforceable for work conducted offshore. 

Some Concerns Have Been Raised That Offshoring May Pose Increased Risks 
to National Security and Critical Infrastructure, Though Some Experts 
Contend That Offshoring May Not Pose Additional Major Risks: 

Some security and offshoring experts, including the Department of 
Defense (DOD), have raised concerns that offshoring could pose 
increased risks to national security and critical infrastructure, but 
others believe that offshoring will not. National security concerns 
relate to government programs and systems involved in national defense, 
particularly military and intelligence operations. Critical 
infrastructure concerns relate to systems and structures owned by 
either government or private entities that are essential to the 
country, such as utilities, transportation, and communications 
networks.[Footnote 53] 

One concern raised by security experts is that offshoring the 
development of software used in defense systems could pose additional 
security risks, specifically, that foreign workers with hostile 
intentions could obtain critical information or introduce malicious 
code into software products that could interfere with defense or 
infrastructure systems. There are currently few explicit restrictions 
on the type of services work that can be sent offshore.[Footnote 54] 
DOD's Defense Security Service has analyzed this issue and identified 
concerns with the potential exploitation of software developed in 
foreign research facilities and software companies for projects related 
to classified or sensitive programs.[Footnote 55] We have reviewed 
DOD's management of software developed overseas for defense weapons 
systems as well.[Footnote 56] Our report noted that multiple 
requirements and guidance acknowledge the inherent risks associated 
with foreign access to classified or export-controlled information and 
technology and are intended to protect U.S. national security by 
managing such access. However, we found that DOD does not require 
program managers of major weapons systems to identify or manage the 
potential security risks from foreign suppliers. For instance, DOD 
guidance for program managers to review computer code from foreign 
sources not directly controlled by DOD or its contractors is not 
mandatory. In addition, DOD programs cannot always fully identify all 
foreign-developed software in their systems. 

Private-sector groups and government officials have raised similar 
concerns about the added security risks posed by offshoring to U.S. non-
military critical infrastructure, such as nuclear power plants, the 
electric power grid, transportation, or communications networks. For 
example, some have noted that sensitive but unclassified information, 
such as the plans of important U.S. utilities or transport networks, 
could be sent to foreign locations where it could be released 
improperly or made available to hostile foreign nationals. Other 
concerns relate to the offshoring of software development and 
maintenance. Software security experts in the public sector--including 
DOD and the Central Intelligence Agency--have expressed concern that 
organizations and individuals with hostile intentions, such as 
terrorist organizations and foreign government economic and information 
warfare units, could gain direct access to software code by 
infiltrating or otherwise influencing contractor and subcontractor 
staff, and then use this code to perpetrate attacks on U.S. 
infrastructure systems or conduct industrial or other forms of 
espionage. Security experts also note that critical infrastructure 
systems rely extensively on commercial off the shelf (COTS) software 
programs that are developed in locations around the world. These 
programs include exploitable vulnerabilities and potentially even 
malicious code that can allow indirect access to infrastructure systems 
to cause the systems to perform in unintended ways. Thus, some experts 
believe that ongoing use of COTS software modules, whether developed 
offshore or not, as well as offshoring of software-related services 
could increase the risk of unauthorized access to critical 
infrastructure code in comparison to in-house development and 
maintenance of proprietary programs and code. 

Security experts also express concerns about longer-term effects of 
offshoring. For instance, some note that continued offshoring of 
certain products might make the U.S. dependent on foreign operations 
for critical civilian or military products, and therefore vulnerable if 
relations between the U.S. and those countries become hostile. Another 
concern is the ability to control access to certain civilian 
technologies with military uses when work on these technologies takes 
place in foreign locations. Some fear that offshoring certain high-tech 
work may lead to the transfer of information and technology that could 
be used by foreign entities to match or counter current U.S. technical 
and military superiority. The U.S. can control exports of such dual-use 
technologies by requiring firms to obtain an export license from the 
Department of Commerce before they can be worked on in foreign 
locations or by foreign nationals. We have reviewed some aspects of 
this export licensing program and found key challenges to Commerce's 
primary mechanism for ensuring compliance with export 
licenses.[Footnote 57] 

Some representatives of business groups contend that offshoring may not 
pose major increased security concerns for a variety of reasons. Some 
believe that protections currently in place are adequate to manage the 
added risks posed by offshoring. Currently, the Department of Defense 
has mandatory procedures to safeguard classified information that is 
released to U.S. government contractors, and firms that offshore 
certain work related to military technologies are required to obtain 
export licenses from either the State or Commerce departments.[Footnote 
58] In addition, some argue that foreign workers in offshore locations 
do not necessarily pose added security risks, relative to U.S. workers 
in domestic outsourced operations, because domestic workers could also 
improperly handle information. Some foreign affairs experts also argue 
that offshoring could have positive effects on national security. They 
contend that increased international trade may reduce the threat of 
international tensions because countries with integrated economies have 
a stake in one another's well-being. 

Concerns Have Been Raised about the Impact of Offshoring on Personal 
Privacy: 

Experts express varying degrees of concern about the impact offshoring 
may have on personal privacy when medical and financial records become 
accessible in overseas locations. Privacy advocates, academics, and 
offshoring researchers have noted concerns with the possibility that 
personal information sent to foreign locations could be improperly 
released, leading to identity theft, diversion of funds, and breaches 
of confidentiality. However, others note that the Gramm-Leach-Bliley 
Act, which covers the privacy of financial information, limits 
disclosure of personal information and requires financial institutions 
to protect the security and confidentiality of their customers' 
personal information through written agreements when information is 
sent to a third-party service provider. The privacy of medical 
information is covered under the Health Insurance Portability and 
Accountability Act Privacy Rule, which requires certain entities that 
hold medical records to receive satisfactory written assurance that any 
of their business associates will handle information appropriately. We 
are currently conducting work that examines offshoring of protected 
health information and related privacy issues. 

Underlying the debate about the effects of offshoring on security are 
difference perspectives on the following questions: 

* To what extent does offshoring pose added security risks? 

* Do existing laws, regulations, and controls provide adequate 
protection from the added risks posed by offshoring that do exist? 

A Wide Range of Policies Have Been Proposed to Address Concerns about 
Offshoring's Potential Impacts: 

Offshoring observers have proposed a broad range of policies in 
response to offshoring, representing a variety of different ideas about 
how public policies could address the concerns raised by offshoring. We 
have categorized these proposals into four types on the basis of 
concerns they seek to address: (1) improving U.S. global 
competitiveness, (2) addressing effects on the U.S. workforce, (3) 
addressing security concerns, and (4) reducing the extent of 
offshoring. Some analysts have proposed policies in more than one of 
these areas. On the other hand, it is also possible to take the 
position that services offshoring does not warrant any changes in 
government policies. While we indicate the rationales that have been 
presented for the various policy proposals, we do not evaluate the 
merits and drawbacks of these proposals. Relevant factors to consider 
in evaluating proposals would include the magnitude of the problems 
that policy proposals seek to address, likely effectiveness of the 
proposals, potential negative consequences, financial costs to 
government, and feasibility of administration. 

Proposals to Improve the Competitiveness of the US Economy: 

Proponents of policies that seek to improve U.S. global competitiveness 
view offshoring as one aspect of much broader economic and trade issues 
and maintain that the debate should be focused on issues broader than 
the offshoring of work by companies headquartered in the U.S. They 
contend that the appropriate focus should be on the broader public 
policy issue of how the U.S. can continue to compete and attract high- 
paying jobs in a time of rapidly increasing trade and open global 
markets that allow multinational firms to hire labor from around the 
world. These proponents have articulated proposals that seek to help 
the U.S. economy develop new areas of specialization in response to 
increased foreign competition by fostering the types of industries and 
businesses that can succeed in a global economy and promote the 
creation of high-value jobs. In addition, some regard these proposals 
as important for promoting U.S. economic growth, regardless of the 
offshoring debate. Many of these proposals have been articulated as 
broad policy objectives, such as "fostering innovation" or "improving 
education" rather than as specific policy mechanisms to achieve these 
objectives. Suggestions for how to improve U.S. global competitiveness 
include proposals to promote innovation and creative industries, 
improve human capital and the skill level of the U.S. workforce, reduce 
the costs of doing business in the U.S., and establish trade practices 
that promote U.S. exports. 

Promoting Innovation: 

Many economists and policy analysts have predicted that for the U.S. 
economy to successfully adjust to offshoring, it will need to develop 
and produce new, innovative goods and services that require and reward 
higher levels of skill, and they believe that government actions can 
help to bring about this development. In addition, they point out that 
private companies can lack the incentives and time horizons to invest 
sufficiently in basic research--research undertaken without specific 
desired applications but that can lead to innovations. Some have also 
noted that federal funding for basic research has recently declined as 
a percentage of GDP and that foreign governments are increasing their 
research spending to improve their own economies' innovative 
capacity.[Footnote 59] Policies that have been proposed to promote 
innovation include: 

* Increasing government support for basic research and development 
projects. 

* Making permanent the current research and development tax credit to 
encourage companies to increase their own spending. Currently, the tax 
system allows businesses to obtain a tax credit for certain spending on 
research and development, but this credit requires regular 
reauthorization, rather than being a permanent feature of the tax 
code.[Footnote 60] 

* Increasing government spending on particular forms of infrastructure 
and technology that can support innovation, such as broadband Internet 
connections. 

Improving Workforce Skills: 

Many who emphasize the broad goal of improving U.S. competitiveness 
also support upgrading the nation's workforce skills and human capital 
by improving education, increasing opportunities for worker training, 
and reforming immigration policy. They contend that for the economy to 
move into higher-end, innovative products to replace job functions that 
have been offshored, more American workers will need to develop the 
knowledge and skills to perform complex, nonroutine work. In 
particular, they emphasize the importance of education programs in the 
science, technology, engineering, and mathematics fields.[Footnote 61] 
In addition, some have noted that workers will increasingly need to 
upgrade their skills continually throughout their careers in order to 
adjust to rapid changes in the modern economy. As a result, many 
policies proposed in response to offshoring seek to increase the skill 
level of current and future generations of U.S. workers, including the 
following proposals: 

* Improving K-12 education, with special attention on increasing 
achievement in math and science fields. Proponents of these policies 
argue that U.S. students demonstrate poor achievement in these subjects 
relative to students in other nations, bringing into question whether 
the U.S. will have an adequate supply of scientists and engineers to 
sustain a globally competitive and innovative economy. 

* Expanding and improving lifelong learning through increased federal 
support of worker training and advanced adult education programs. One 
specific proposal is instituting "human capital tax credits" that could 
be offered either to businesses that spend money on worker training 
programs or to individuals who spend money on their own education. Such 
tax credits could partially offset the costs to business of training 
workers who may not stay with a company for long and the costs to 
workers of learning skills that may not guarantee long-term employment. 

* Encouraging immigration of high-skilled workers. Proponents of these 
policies note that a large and growing segment of U.S. scientists and 
engineers are foreign-born. Specific proposals to increase the number 
of highly educated immigrants in the U.S. include raising the number of 
temporary work visas that allow high-skilled workers to enter the 
country and expediting the issuance of green cards for foreign 
graduates of U.S. universities. 

Reducing Business Costs: 

Other proposals to improve competitiveness focus on ways to reduce the 
costs of doing business in the U.S. relative to other countries. 
Proponents of these policies note that cost reduction is a leading 
motive for businesses to offshore service-sector work and that higher 
costs can affect the ability of U.S. firms to compete against foreign 
firms in the global economy. Proposals to reduce business costs in the 
U.S. include: 

* Reducing federal taxes and regulatory requirements on businesses. 
Proponents of these policies argue that complex and high taxes and 
extensive regulations raise costs for companies to do business in the 
U.S. These proposals assume that taxes in foreign countries would 
remain unchanged, so that a decline in U.S. taxes would reduce the cost 
of doing business in the U.S. relative to the cost of doing business 
overseas, thus increasing incentives for companies to keep work in the 
U.S. 

* Reducing costs to businesses of providing health care to employees. 
Proponents of these policies argue that high health care costs drive up 
the total cost of labor compensation for employers, although it is 
possible that increases in U.S. health care costs could be partially or 
fully offset by decreases in other components of labor compensation. 
Various approaches have been proposed to decrease health care costs, 
such as use of improved technology in the management of patient care, 
establishing association health plans that would allow small businesses 
greater leverage in negotiations with health insurance providers, and 
establishing a universal healthcare system. 

Enhancing U.S. Exports: 

Another type of policy response to offshoring and increasing global 
interdependence focuses on expanding the market for U.S. exports. 
Proponents of these policies contend that several factors may be 
depressing U.S. exports and that more can be done to "level the playing 
field" of international trade. One concern is that while the U.S. has 
opened up its markets to foreign competition, some foreign governments 
have not opened certain of their markets, especially for services in 
which U.S. companies are globally competitive, such as financial 
services. Where trade agreements are in place, some have raised 
concerns that certain foreign governments may be violating them, such 
as by providing subsidies to their own industries or imposing nontariff 
barriers to their markets. A further concern that has been expressed is 
that some foreign governments may be artificially lowering the value of 
their currencies relative to the dollar so that their exports are 
relatively inexpensive, while U.S. exports become relatively more 
expensive.[Footnote 62] Policies that have been proposed to redress 
these concerns and enhance U.S. exports include the following: 

* Continuing to negotiate trade agreements that will open foreign 
markets in which U.S. companies have export opportunities. 

* Taking more aggressive actions to challenge foreign government 
actions that may violate existing trade agreements, such as bringing 
actions at the World Trade Organization (WTO) and imposing retaliatory 
measures allowed under WTO rules. Such violations could include foreign 
countries' tax incentives to U.S. companies that offshore or inadequate 
protection of intellectual property rights of U.S. imports, which harms 
the sales of U.S. products forced to compete with unlicensed 
versions.[Footnote 63] 

* Continuing to persuade countries that may have undervalued currencies 
to raise their currency values or to otherwise engineer a controlled 
decline in the value of the dollar.[Footnote 64] 

Proposals to Assist Workers Affected by Offshoring: 

Proposals to address concerns about offshoring's effects on workers 
seek to reduce the costs borne by some individuals when an economy 
becomes increasingly open to foreign trade and competition. Many of 
these proposals would provide assistance to workers during their period 
of unemployment and to help them obtain new jobs. While some of these 
proposals put particularly strong emphasis on retraining displaced 
workers, not all observers agree that retraining policies would be 
effective. Other proposals would expand broad social insurance programs 
that would cover all workers and provide benefits to anyone who loses a 
job. 

Assisting Displaced Workers in Transition to New Employment: 

Many proposals to help workers affected by offshoring focus on programs 
designed to help workers adjust to job losses and to facilitate their 
reemployment. These include the following proposals: 

* Amending the Worker Adjustment and Retraining Notification (WARN) Act 
to increase the notice that employers must give employees from 60 to 90 
days when offshoring will cause a mass layoff or plant 
closure.[Footnote 65] 

* Extending the Trade Adjustment Assistance (TAA) program to services 
workers. The TAA program provides extended unemployment benefits and 
subsidized training to workers involved in the production of articles 
who can demonstrate that they were displaced due to increased imports 
or shifts in production to foreign countries. It generally serves 
workers who have been laid off from the manufacturing sector.[Footnote 
66] 

* Expanding or developing income support and reemployment programs that 
would assist displaced workers in general, not just those who meet TAA 
criteria. Several policy advocates and researchers who have studied 
offshoring have stated that existing government programs to serve 
displaced workers do not provide adequate protections or assistance for 
a changing economy in which global trade affects more workers. For 
instance, they have questioned the effectiveness of existing worker 
retraining programs or expressed doubts that retraining will be an 
effective response as international pressures begin to affect higher- 
skilled occupations and workers who already have advanced educations. 

* Establishing wage insurance, a program that would pay displaced 
workers who find reemployment at a lower wage a percentage of the 
difference between their previous and new earnings for a limited time. 
Proponents of wage insurance contend that it would provide incentives 
for dislocated workers to reenter the labor market quickly, even if 
they must do so at lower wages. In addition, proponents maintain that 
wage insurance could encourage workers to take jobs in unfamiliar 
fields where their inexperience commands lower wages, but where the job 
imparts new in-demand skills, and allow them to build new 
careers.[Footnote 67] 

Broader Reforms of Social Insurance Programs: 

Some have proposed broader reforms to strengthen the social safety net 
and mitigate some of the hardships generated by the economic insecurity 
associated with an increasingly integrated global economy. Proponents 
of these policies emphasize the need to accompany open trade policies 
with enhanced social protections for all workers who are increasingly 
exposed to risks by international competition, such as job loss, job 
insecurity, or downward wage pressure. In addition, proponents contend 
that government policies should compensate workers who bear the costs 
of trade-induced economic disruptions. Such proposals would potentially 
affect large segments of the population and would require extensive 
rethinking and redesign of U.S. social policy, but proponents maintain 
that they could increase public acceptance of open trade policies. Such 
proposals include the following: 

* Making health and pension benefits portable and/or universal so that 
workers who lose their jobs can retain their access to medical care and 
retirement plans. Some favor the government's providing universal 
health care coverage, and others propose preserving or expanding 
portable or universal retirement coverage. 

* Requiring employers that move jobs offshore to pay some of the costs 
for worker assistance programs. Proponents contend that government 
should play a role in redistributing some of the gains from offshoring 
to workers who have been negatively affected. Proponents believe that 
such proposals would serve this principle and could mitigate some 
concerns about offshoring's effects on income inequality. 

Proposals to Protect Security: 

Proposals to address concerns about security seek to reduce the added 
risk that information sent to foreign locations could be used in ways 
that could impair U.S. national security, critical infrastructure, or 
personal privacy. Proposals include restrictions on certain types of 
work with security implications and strengthening standards governing 
how information is handled. 

Protecting National Security and Critical Infrastructure: 

Concerns that offshoring could pose increased risks to national 
security or critical infrastructure have led to proposals to restrict 
some services work from being sent to foreign locations or performed by 
foreign nationals and to improve security standards for work that is 
performed offshore, including the following proposals: 

* Requiring that certain projects involving defense acquisitions or 
military equipment be performed exclusively in the U.S. 

* Requiring that work on critical infrastructure projects such as 
electricity grids or pipelines be done within the U.S. 

* Increasing the standards and review procedures that apply to use of 
offshore services. For example, GAO has previously recommended that DOD 
adopt more effective practices for developing software and increasing 
oversight of software-intensive systems, such as ensuring that risk 
assessments of weapons programs consider threats to software 
development from foreign suppliers.[Footnote 68] 

Protecting Personal Privacy: 

Concerns that offshoring could pose added risks to the privacy of 
personal information have led to a variety of proposals to enhance 
protections, including the following: 

* Requiring companies to keep work involving sensitive private 
information in the U.S. 

* Requiring companies to notify and obtain consent from U.S. residents 
before sending personal information to be processed in other countries. 

* Ensuring that consumers have legal recourse against U.S. firms for 
privacy breaches by foreign contractors. 

* Strengthening U.S. laws and regulations concerning the handling of 
personal information, regardless of whether the data are handled 
domestically or overseas. Those who propose this option contend that 
U.S. laws and regulations do not provide adequate protections for 
personal information in general, regardless of where the information is 
handled. 

Proposals to Reduce the Extent of Offshoring: 

Another type of policy that has been proposed to address the various 
concerns raised by offshoring focuses on reducing the extent of 
offshoring. Some of these policy proposals focus on offshoring by 
government agencies, while others seek to modify firms' incentives with 
respect to where they source their work. 

Restricting Offshoring by Government Agencies: 

There have been numerous proposals to limit or constrain offshoring by 
federal and state governments, including the following 
examples:[Footnote 69] 

* Legislation proposed to prohibit federal work or federally funded 
work from being performed in foreign countries, unless the foreign 
goods or services are for use in that country. 

* Legislation proposed to require contractors with the U.S. military 
and executive agencies to have at least 50 percent of their workforce 
in the U.S. 

* Legislation proposed to prohibit the federal government from 
providing assistance to, or doing business with, companies that in the 
last 5 years offshored jobs previously performed in the U.S., unless 
the company also creates significant replacement jobs in the U.S. 

* Legislation proposed in several states to restrict the procurement of 
state-funded services from overseas. 

* Proposals to prohibit government contracts from going to countries 
that have not signed trade agreements with the U.S. on non- 
discrimination in government procurement. 

Modifying the U.S. Tax Code to Reduce Incentives for Offshoring: 

Another proposed means of reducing offshoring is to change tax policy 
to alter the relative costs of domestic versus foreign production. Many 
economists and policy analysts believe the current tax system provides 
incentives for U.S. multinational firms to locate work at their 
overseas affiliates because it allows them to defer taxes on profits 
earned on some activities in foreign countries until the profits are 
brought back to the U.S. However, some note that this tax treatment 
helps U.S.-owned businesses compete in foreign markets against foreign- 
owned businesses.[Footnote 70] Proposals for changing the tax code 
include: 

* Eliminating the ability of firms to defer foreign-earned income by 
taxing foreign profits at the same rate as domestic profits in the year 
they are earned. This proposal would affect only offshoring that takes 
place between U.S.-based multinational firms and their foreign 
affiliates. It would not affect offshoring that involves outsourcing 
work to separate firms located overseas. 

* Establishing a value-added tax (VAT) system, in which a tax could be 
applied to products imported to the U.S. and rebated on products the 
U.S. exports. However, as GAO and others have reported, many economists 
believe that such border tax adjustments would not affect the trade 
balance in the long run because exchange rates would adjust to offset 
the border adjustments.[Footnote 71] 

Providing Incentives for Businesses to Locate Work in the U.S. 

Other policy proposals would enhance incentives for firms to locate 
work domestically. Proponents of these policies note that foreign 
governments award incentives, such as providing buildings, 
infrastructure, and tax exemptions, to companies that export service 
products. In response, some suggest that the U.S. provide similar 
incentives, including the following proposals: 

* Providing tax reductions or subsidies to companies that employ 
domestic workers. One specific proposal is a tax credit for companies 
in certain industries identified as affected by offshoring that would 
cover the payroll taxes of newly hired employees. 

* Providing federal assistance for regional economic development plans, 
including infrastructure improvements and grants targeted at attracting 
work that might otherwise be offshored. 

Additional Research in Key Areas May Help Advance the Offshoring Debate: 

Determining appropriate policy responses to the offshoring phenomenon 
is challenging for several reasons. Services offshoring is a relatively 
recent phenomenon that raises a broad range of issues. No federal data 
series directly measure the extent of offshoring or its effects. 
Moreover, experts have expressed differing views about the potential 
impacts of offshoring. Nevertheless, there are some key areas where 
further research might help to provide more information about the 
impacts and policy implications of services offshoring. These areas 
include: 

* impacts of offshoring on various sectors of the U.S. economy, and 
especially the sectors that are emerging as new sources of comparative 
advantage; 

* impacts of offshoring on the workforce, such as numbers of workers 
displaced and their reemployment experiences; 

* impacts of offshoring on the U.S. income distribution, including 
trends in wage levels of jobs moving offshore; and: 

* any increased security-related risks posed by offshoring and the 
extent to which these are mitigated by current practices and laws. 

Further research in these areas could help inform policy making by 
providing more information about the nature and magnitude of the 
benefits and costs resulting from offshoring. For example, research on 
whether offshoring is negatively impacting important sectors of the 
economy could help to inform the need for new policies to enhance U.S. 
competitiveness. Further information on the number of job losses 
resulting from offshoring as well as how workers fare in the labor 
market after their dislocations could help inform the need for new 
policies to assist displaced workers and to target these policies 
appropriately. Research on how offshoring is affecting the distribution 
of income in the U.S. could help to inform policy makers whether new 
policies are needed to address income inequality. Research that 
examines whether offshoring increases risks to national security, 
critical infrastructure, and consumer privacy can help to inform policy 
makers whether there is a need for additional security protections. 
Finally, research in all of these areas may help to advance the debate 
about whether policies to reduce the extent of offshoring are warranted. 

Researchers are conducting studies that can shed light on some of these 
areas. For example, some researchers have conducted case studies that 
examine the effects of offshoring in the semiconductor, call center, 
and radiology industries.[Footnote 72] Among other issues, these 
studies examined the types of work that are conducted offshore and the 
types of work that are conducted in the U.S. In their study of the 
radiology industry, for instance, Frank Levy and Ari Goelman conclude 
that radiology work conducted overseas is unlikely to displace 
radiology work done in the U.S., noting that offshore work primarily 
consists of preliminary readings of radiological images conducted at 
night when few radiologists in the U.S. would be available. However, 
the radiology industry may not be comparable with other industries in 
which offshoring takes place. Other researchers have utilized 
statistical methods for analyzing existing data series. For example, 
Martin Baily and Robert Lawrence have used a variety of methods to 
analyze trade and employment data and examine offshoring's effects on 
unemployment.[Footnote 73] In some instances, researchers may be able 
to apply statistical methods that were utilized in research on 
offshoring and trade in the manufacturing sector to conduct research on 
services offshoring. 

There may also be opportunities to expand or improve current federal 
data series to obtain more information on this topic. For example, some 
have raised concerns that there is a significant discrepancy between 
data on the levels of services imports from India as reported by U.S. 
federal government sources and the data reported by India. In a review 
of BEA and Indian services data, we identified several factors that 
contributed to this discrepancy, such as differences in each country's 
definitions of trade in services. We also recommended ways in which BEA 
can further improve its services trade data.[Footnote 74] Other 
examples of limitations of current databases identified by offshoring 
researchers are that data on services trade are not available at a 
sufficiently detailed industry level, trade data may not capture 
services that are bundled with goods or other services, and data on 
foreign affiliates of multinational corporations lack information on 
occupations of workers employed overseas.[Footnote 75] 

Table 1 illustrates some key areas where further research might 
contribute to a better understanding of the effects and policy 
implications of offshoring. The table identifies some pertinent data 
sources, though none of the sources can directly answer the research 
questions. Generally speaking, these data sources can provide 
information on a phenomenon, such as changes in employment in a given 
occupation or changes in the output produced by an industry, but they 
cannot provide information on the extent to which these changes 
resulted from offshoring. For example, BLS collects data on employment 
levels in various industries and occupations, but the data capture job 
losses and gains that occur for all reasons, not only because of 
offshoring. Table 1 also identifies some of the methodological 
approaches that have been, or could be, used in these areas of 
research. These include conducting in-depth studies of firms and 
industries and using statistical methods for analyzing existing data. 
Table 1 also highlights some potential challenges and limitations of 
the various approaches. For example, while in-depth studies of services 
offshoring in particular industries may shed light on some dynamics of 
the offshoring phenomenon, their findings are not necessarily 
reflective of what is occurring nationally. Our overview of research 
questions, data sources, research methods, and limitations is not meant 
to be exhaustive. Researchers will continue to pose new questions and 
approaches to gain further insights into offshoring. 

Table 1: Some Key Areas for Additional Research on Services Offshoring 
and Possible Approaches for This Research: 

[See PDF for Image] 

[End of Table] 

Concluding Observations: 

Services offshoring is likely to remain an important public policy 
issue for years to come. The extent of offshoring could increase in the 
future as technology advances, U.S. firms become more adept at 
offshoring, and other countries continue to improve their abilities to 
provide services for the global economy. Because the services 
offshoring phenomenon is relatively new, little is known about its 
effects on the U.S. economy and society. Due to limited data and 
empirical research thus far, the debate about offshoring has largely 
been theoretical in nature. Policy makers and analysts face data 
challenges as they seek to assess the wide range of policies that have 
been proposed in response to offshoring. In making these assessments, 
they may consider various relevant factors, such as the magnitude of 
the problems that policy proposals seek to address, likely 
effectiveness of the proposals, potential negative consequences, 
financial costs to government, and feasibility of administration. 

As the offshoring phenomenon continues, researchers in both the public 
and private sectors are likely to conduct more studies and collect more 
data that will provide a clearer understanding of offshoring and its 
effects. We have highlighted some key areas where further research 
might help advance the debate about the impacts and policy implications 
of offshoring. While such research faces numerous challenges and 
limitations, it offers some prospect for additional insights on diverse 
aspects of services offshoring. 

Agency Comments: 

We provided a draft of this report to the Departments of Commerce, 
Labor, Treasury, and the Office of the United States Trade 
Representative. We received written comments from Commerce, which are 
reprinted in appendix III. Commerce stated that it appreciated the 
thoroughness of our review and that the report will be a useful 
reference starting point for discussions of the causes and impacts of 
offshoring. Commerce also stated that offshoring may raise living 
standards for the average American and affect fewer workers than the 
headlines seem to indicate, but that all of us must be troubled when 
any American workers lose their jobs, for whatever reason. Commerce 
added that the most powerful remedy for this problem is a growing 
economy that can ensure every American who wants a job is able to find 
one. Commerce, Treasury, and the Office of the U.S. Trade 
Representative provided technical comments, and we modified the report 
as appropriate to address these comments. The Department of Labor did 
not have comments. 

Copies of this report are being sent to the Departments of Commerce, 
Labor, and Treasury; the Office of the U.S. Trade Representative; 
appropriate congressional committees; and other interested parties. 
Copies will be made available to others upon request. The report is 
also available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about matters discussed in this 
report, please contact me at (202) 512-7215 or at nilsens@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Other contacts 
and staff acknowledgments are listed in appendix IV. 

Signed by: 

Sigurd R. Nilsen: 
Director, Education, Workforce, and Income Security Issues: 

List of Committees: 

The Honorable Ted Stevens: 
Chairman: 
The Honorable Daniel K. Inouye: 
Ranking Minority Member: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The Honorable Michael B. Enzi: 
Chairman: 
The Honorable Edward M. Kennedy: 
Ranking Minority Member: 
Committee on Health, Education, Labor, and Pensions:
United States Senate: 

The Honorable John A. Boehner: 
Chairman: 
The Honorable George Miller :
Ranking Minority Member: 
Committee on Education and the Workforce: 
House of Representatives: 

The Honorable Joe Barton:
Chairman:
The Honorable John D. Dingell: 
Ranking Minority Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable William B. Thomas 
Chairman: 
The Honorable Charles B. Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

Our objectives in this study were to: (1) describe experts' views about 
the potential effects of services offshoring on the U.S. economy, 
workforce, national security, and consumer privacy; (2) describe the 
types of policies that have been proposed in response to offshoring; 
and (3) discuss areas where further research could advance the debate 
on offshoring. Our methodology consisted of an extensive literature 
review and interviews of selected experts. In addition, we attended 
several conferences on services offshoring during the course of our 
work. We conducted our work from May 2004 to November 2005 in 
accordance with generally accepted government auditing standards. 

We reviewed literature on services offshoring produced by academic 
experts, think tanks, business groups, labor groups, and government 
agencies such as the Congressional Research Service. Our literature 
review built upon work conducted under previous GAO studies of services 
offshoring. We collected additional literature by reviewing research 
databases such as Econlit and Proquest and through general Internet 
searches. We also conducted targeted searches of the literature 
produced by various think tanks, interest groups, and other government 
agencies. In addition, we were referred to literature through citations 
in other literature, through media accounts, and by experts we 
interviewed. Through the course of our work, we sought to obtain a 
diverse body of literature that described various views on the 
potential effects of services offshoring and policy proposals. For 
studies summarizing empirical research findings, GAO reviewed these 
studies solely to describe the views of various experts on the effects 
of offshoring and the research methodologies they used. The inclusion 
of studies in this report does not imply that we deem them definitive 
or that the evidence presented in them is conclusive. Additionally some 
of these studies contain estimates of job losses due to offshoring of 
services that are of undetermined reliability. These estimates are 
presented for illustrative purposes and should not be considered in the 
same manner as the official government data on employment and trade 
discussed in the report. See the bibliography for a list of key 
literature reviewed for this report. 

We interviewed experts from government agencies, academia, think tanks, 
and organizations representing business and labor interests. We met 
with government officials at the departments of Commerce, Labor, and 
Treasury, and at the Office of the U.S. Trade Representative because 
each of these agencies analyzes issues related to offshoring. We 
selected other experts to interview based upon literature they 
published related to the offshoring phenomenon and through referrals by 
other experts. We strove to obtain a balance of views among the experts 
we interviewed. In addition to interviewing experts, we also reviewed 
interviews conducted for other GAO work on services offshoring. See 
appendix II for a list of experts interviewed for this report. 

We also attended several conferences related to services offshoring to 
obtain further viewpoints on this topic, including conferences 
organized by the Brookings Institution, William Davidson Institute at 
the University of Michigan Business School, CATO Institute, Labor and 
Worklife Program at Harvard Law School and the North American Alliance 
for Fair Employment, Stanford Business School's Sloan Masters Program 
and World Affairs Council of Northern California, Asia-Pacific Research 
Center at Stanford University, and the Bernard and Audre Rapoport 
Center for Human Rights and Justice of the University of Texas School 
of Law. 

[End of section] 

Appendix II: List of Experts Interviewed: 

Jodie Allen: 
Senior Editor: 
Pew Research Center: 

Robert Atkinson: 
Vice President & Director: 
Technology & New Economy Project: 
Progressive Policy Institute: 

Ashok Bardhan: 
Senior Research Associate: 
Fisher Center for Real Estate & Urban Economics, Haas School of 
Business, University of California Berkeley: 

William Baumol: 
Professor of Economics: 
New York University: 

Jagdish Bhagwati: 
Professor of Economics: 
Columbia University: 

Josh Bivens: 
Trade Economist: 
Economic Policy Institute: 

Susan Collins: 
Senior Fellow, Economic Studies: 
The Brookings Institution: 

Ralph Gomory: 
President: 
Alfred P. Sloan Foundation: 

Ron Hira: 
Assistant Professor of Public Policy: 
Rochester Institute of Technology and Vice President for Career 
Activities, Institute of Electrical and Electronics Engineers-USA: 

Josh James: 
Manager of Research: 
American Electronics Association: 

Matthew Kazmierczak: 
Director of Research: 
American Electronics Association: 

Martin Kenney: 
Professor of Human and Community Development: 
University of California Davis: 

Lori Kletzer: 
Professor of Economics: 
University of California, Santa Cruz: 

Cynthia Kroll: 
Senior Regional Economist: 
Fisher Center for Real Estate & Urban Economics, Haas School of 
Business, University of California Berkeley: 

Jeff Lande: 
Senior Vice President: 
Information Technology Association of America: 

Robert Lawrence: 
Professor of International Trade and Investment: 
Center for Business & Government, John F. Kennedy School of Government, 
Harvard University: 

Thea Lee: 
Assistant Director for International Economics: 
AFL-CIO: 

Robert Litan: 
Senior Fellow Economic Studies: 
The Brookings Institution: 

Catherine Mann: 
Senior Fellow: 
Institute for International Economics: 

Lee Price: 
Research Director: 
Economic Policy Institute: 

Robert Reich: 
Professor of Social and Economic Policy: 
Brandeis University: 

Dani Rodrik: 
Professor of International Political Economy: 
John F. Kennedy School of Government, Harvard University: 

Enrique Sanchez: 
Director: 
Bank of America (retired): 

Robert Scott: 
Director of International Programs: 
Economic Policy Institute: 

Timothy Sturgeon: 
Senior Research Affiliate: 
Industrial Performance Center: 
Massachusetts Institute of Technology: 

Diane Swonk: 
Chief Economist: 
Mesirow Financial: 

[End of section] 

Appendix III: Comments from the Department of Commerce: 

United States Department Of Commerce: 
The Under Secretary for Economic Affairs: 
Washington, D.C. 20230: 

Sigurd R. Nilsen: 
Director Education, Workforce and Income Security Issues: 
U.S. General Accountability Office:
Washington, DC 20548: 

Dear Mr. Nilsen: 

Thank you for the opportunity to review and comment on the GAO draft 
report "Offshoring of Services: An Overview of the Issues." As your 
report indicates, there is a great deal of debate over the relative 
importance of offshoring and about its benefits to the U.S. economy. 

Offshoring may affect fewer workers than the headlines seem to 
indicate, and it may raise living standards for the average American. 
But all of us must be troubled when any American workers lose their 
jobs, whatever the reason. The most powerful remedy for this problem is 
a growing economy that can ensure every American who wants a job is 
able to find one. The economy's recent impressive job growth is surely 
the best answer of all to concerns about offshoring. 

We appreciate the thoroughness of your review of this debate. By 
defining the terns of that debate, this report will be a useful 
reference starting point for discussions of the causes and impact of 
offshoring. I enclose the U.S. Department of Commerce's recommended 
changes regarding factual or technical information. 

Signed by: 

Keith Hall:
Under Secretary for Economic Affairs: 

Enclosure: 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Sigurd R. Nilsen, (202) 512-7215, nilsens@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Andrew Sherrill, Assistant 
Director; Yunsian Tai and Katrina Ryan, Analysts in Charge; Rhiannon 
Patterson; Eric Wenner; Margaret Armen; Lawrance Evans, Jr; and Tovah 
Rom made significant contributions to this report. 

[End of section] 

GAO Related Products: 

Defense Acquisitions: Knowledge of Software Suppliers Needed to Manage 
Risks. GAO-04-678. Washington, D.C.: May 25, 2004. 

Defense Trade: Better Information Needed to Support Decisions Affecting 
Proposed Weapons Transfers. GAO-03-694. Washington, D.C.: July 11, 2003. 

Export Controls: Post-Shipment Verification Provides Limited Assurance 
That Dual-Use Items Are Being Properly Used. GAO-04-357. Washington, 
D.C.: January 12, 2004. 

Export Controls: Processes for Determining Proper Control of Defense- 
Related Items Need Improvement. GAO-02-996. Washington, D.C.: September 
20, 2002. 

Federal Procurement: International Agreements Result in Waivers of Some 
U.S. Domestic Source Restrictions. GAO-05-188. Washington, D.C.: 
January 26, 2005. 

Higher Education: Federal Science, Technology, Engineering, and 
Mathematics Programs and Related Trends. GAO-06-114. Washington, D.C.: 
October 12, 2005. 

Highlights of a GAO Forum: Workforce Challenges and Opportunities for 
the 21st Century: Changing Labor Force Dynamics and the Role of 
Government Policies. GAO-04-845SP. Washington, D.C.: June 2004. 

Industrial Security: DOD Cannot Ensure Its Oversight of Contractors 
under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: 
July 15, 2005. 

International Trade: Current Government Data Provide Limited Insight 
into Offshoring of Services. GAO-04-932. Washington, D.C.: September 
22, 2004. 

International Trade: Further Improvements Needed to Handle Growing 
Workload for Monitoring and Enforcing Trade Agreements. GAO-05-537. 
Washington D.C. June 30, 2005. 

International Trade: Treasury Assessments Have Not Found Currency 
Manipulation, but Concerns about Exchange Rates Continue. GAO-05-351. 
Washington, D.C.: April 19, 2005. 

International Trade: U.S. and India Data on Offshoring Show Significant 
Differences. GAO-06-116. Washington, D.C.: October 27, 2005. 

Tax Policy and Administration: Review of Studies of the Effectiveness 
of the Research Tax Credit. GAO/GGD-96-43. Washington, D.C.: May 21, 
1996. 

Trade Adjustment Assistance: Reforms Have Accelerated Training 
Enrollment, but Implementation Challenges Remain. GAO-04-1012. 
Washington, D.C.: September 22, 2004. 

The Worker Adjustment and Retraining Notification Act: Revising the Act 
and Educational Materials Could Clarify Employer Responsibilities and 
Employee Rights. GAO-03-1003. Washington, D.C.: September 19, 2003. 

[End of section] 

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Schultze, Charles L. "Offshoring, Import Competition, and the Jobless 
Recovery." The Brookings Institution Policy Brief 136. Washington, 
D.C.: The Brookings Institution, August 2004. 

Seshasai, Satwik and Amar Gupta. "Global Outsourcing of Professional 
Services." Working Paper 4456-04. Cambridge, Mass.: MIT Sloan School of 
Management, January 2004. 

Stiroh, Kevin J. "Information Technology and the U.S. Productivity 
Revival: A Review of the Evidence." Business Economics 37:1 (January 
2002): 30-37. 

United Nations Conference on Trade and Development. World Investment 
Report 2004: The Shift Towards Services. New York and Geneva: 2004. 

U.S. Chamber of Commerce. Jobs, Trade, Sourcing, and the Future of the 
American Workforce. Washington, D.C.: April 2004. 

U.S. House of Representatives Small Business Committee. The 
Globalization of White-Collar Jobs: Can America Lose These Jobs and 
Still Prosper? Testimony before full committee. Washington, D.C.: June 
18, 2003. 

White & Case. The Debate Over Outsourcing in the United States: A Real 
Threat to Job Growth or an Evolution of Free Trade? Washington, D.C.: 
March 15, 2004. 

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FOOTNOTES 

[1] GAO, International Trade: Current Government Data Provide Limited 
Insight into Offshoring of Services, GAO-04-932 (Washington D.C.: Sept. 
22, 2004). 

[2] For more information about the definition of offshoring, see 
appendix II of GAO-04-932. 

[3] Goods-producing industries may also employ workers in "services" 
occupations (e.g., computer programmers at a computer manufacturer or 
accountants at an automobile company). 

[4] See GAO-04-932. 

[5] These numbers have not been adjusted for inflation. 

[6] The World Trade Organization defines commercial services as 
services (as defined by the International Monetary Fund and Commerce 
Department's Bureau of Economic Analysis) less government services. 

[7] BEA's country-level foreign-direct investment data is valued on a 
historical cost basis. 

[8] These numbers refer to employment by majority-owned nonbank U.S. 
affiliates of foreign multinational corporations. 

[9] Rafiq Dossani and Martin Kenney, "Went for Cost, Stayed for 
Quality? Moving the Back Office to India," Berkeley Roundtable on the 
International Economy Paper. BRIEWP156 (Berkeley, Calif.: University of 
California, Berkeley, 2003). 

[10] Forrester Research, Inc., Offshore Outsourcing: The Complete Guide 
(Sept. 7, 2004); Booz Allen Hamilton, Business Process Offshoring: 
Making the Right Decision (December 2003); The Boston Consulting Group, 
Capturing Global Advantage: How Leading Industrial Companies Are 
Transforming Their Industries by Sourcing and Selling in China, India, 
and Other Low-Cost Countries (April 2004). 

[11] Deloitte Touche Tohmatsu, Making the Off-Shore Call: The Road Map 
for Communications Operators (2004); Nirupam Bajpai, Jeffrey Sachs, 
Rohit Arora, and Harpreet Khurana, "Global Services Sourcing: Issues of 
Cost and Quality," CSGD Working Paper 16 (New York, N.Y.: The Earth 
Institute at Columbia University, June 2004). However, some experts 
note that although wages are rising in some developing countries, the 
wage differential between the U.S. and developing countries is likely 
to remain sizable for some time to come. In addition, as wages rise in 
some developing countries, firms could turn to other countries where 
labor costs remain low. 

[12] These include the Trade Expansion Act of 1962 (Pub. L. No. 87- 
794), Trade Act of 1974 (Pub. L. No. 93-618), Trade Agreements Act of 
1979 (Pub. L. No. 96-39), Export Administration Act (Pub. L. No. 96- 
72), Stevenson-Wydler Technology Innovation Act of 1980 (Pub. L. No. 96-
480), Omnibus Trade and Competitiveness Act of 1988 (Pub. L. No. 100-
418); and the Trade Act of 2002 (Pub. L. No. 107-210). 

[13] Pub. L. No. 98-573; 19 U.S.C. § 2114b. 

[14] Pub. L. No. 105-220; 29 U.S.C. § 2801. 

[15] Productivity is a measure of the efficiency with which an economy 
uses its resources, often defined as increases in output per hour 
worked, and economists believe that productivity is key to long-term 
per-capita income and real wage growth. Labor productivity is defined 
as output per hour of labor worked and depends on (1) the skills (or 
"quality") of the workforce, (2) the amount and quality of the 
technology available to the workforce, and (3) additional factors such 
as the efficacy of management. Labor productivity is the most commonly 
used productivity measure. This measure is convenient for researchers 
because the Bureau of Labor Statistics (BLS) produces quarterly 
measures of labor productivity. A broader productivity measure that is 
sometimes used is multifactor productivity (MFP), also known as total 
factor productivity (TFP). The BLS produces two sets of MFP indexes. 
One multifactor productivity index, produced by the Major Sector 
Multifactor Productivity program, is produced for major sectors of the 
U.S. economy (private business and private non-farm business), the 
manufacturing sector in aggregate, and 20 2-digit Standard Industrial 
Classification (SIC) manufacturing industries and the utility and gas 
industries. The multifactor productivity indexes for the private 
business and private nonfarm business sectors measure output per 
combined unit of labor and capital input, while the multifactor 
productivity indexes for total manufacturing and for the 2-digit SIC 
manufacturing industries provide measures of sector output per combined 
unit of capital (K), labor (L), energy (E), materials (M), and 
purchased business services (S) inputs--called KLEMS inputs. A second 
multifactor productivity index, produced by the Industry Multifactor 
Productivity Program, is produced for 140 3-digit SIC manufacturing 
industries and the railroad transportation industry. The industry 
multifactor productivity measures are constructed in a manner similar 
to the manufacturing sector series. The sector multifactor productivity 
measures and the KLEMS multifactor productivity measures are available 
annually. 

[16] IT-enabled services are broader than IT services. IT-enabled 
services are those services that have been transformed by information 
and communications technology, enabling them to be digitized, codified, 
and fragmented and therefore able to be undertaken at any distance from 
the core business and final customer. These services include those 
often associated with offshoring, including accounting, financial 
analysis, call-center services, architectural drafting, and health- 
record transcription, among other services activities. See Catherine L. 
Mann, "Offshore Outsourcing and the Globalization of U.S. Services: Why 
Now, How Important, and What Policy Implications," The United States 
and the World Economy: Foreign Economic Policy for the Next Decade, ed. 
C. Fred Bergsten and the Institute for International Economics 
(Washington, D.C.: Institute for International Economics, January 
2005), 281-312. 

[17] Catherine L. Mann, "Globalization of IT Services and White Collar 
Jobs: The Next Wave of Productivity Growth," International Economics 
Policy Briefs PB03-11 (Washington, D.C.: Institute for International 
Economics, December 2003). This paper has also received criticism for 
its methodology. See L. Josh Bivens, "Truth and Consequences of 
Offshoring: Recent Studies Overstate the Benefits and Ignore the Costs 
to American Workers," Briefing Paper #155 (Washington, D.C.: Economic 
Policy Institute, Aug. 2, 2005). 

[18] For a summary of this literature, including references to both 
case studies and analyses based on aggregate data and industry and firm 
level data, see Kevin Stiroh, "Information Technology and the US 
Productivity Revival: A Review of the Evidence," Business Economics 
37:1 (January 2002), 30-37. See also Erik Brynjolfsson and Lorin Hitt. 
"Beyond Computation: Information Technology, Organizational 
Transformation and Business Performance," Journal of Economic 
Perspectives 14:4 (fall 2000): 23-48. 

[19] A country is said to have a comparative advantage in the 
production of a good or service if it can produce that good or service 
at a lower opportunity cost than another country. The opportunity cost 
of producing a particular good or service, say cloth, is defined as the 
amount of production of other goods and services that must be given up 
in order to produce one more unit of cloth. This concept should be 
distinguished from absolute advantage, which reflects the quantity of 
productive resources that must be used, rather than what other goods or 
services must be given up by using those productive resources to make 
cloth. 

[20] Some economists have also argued that in the long-term as the 
economies of low-wage trading partners grow, the U.S. will benefit from 
the emergence of intra-industry trade with such trading partners. For 
example, see Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan, 
"The Muddles Over Outsourcing," Journal of Economic Perspectives 18:4 
(Fall 2004): 93-114. Intra-industry trade occurs when a country imports 
and exports goods in the same industry (for example, passenger cars are 
exported and imported by both the U.S and Germany). In intra-industry 
trade, countries still benefit from trade, as the larger market created 
by trade permits economies of scale and consequent product 
differentiation. See also Roy J. Ruffin, "The Nature and Significance 
of Intra-Industry Trade," Economic and Financial Review (Dallas, Tex.: 
Federal Reserve Bank of Dallas, fourth quarter 1999). 

[21] Clair Brown and Greg Linden, "Offshoring in the Semiconductor 
Industry: A Historical Perspective," Berkeley-Doshisha Employment and 
Technology Working Paper cwts-02-2005 (Berkeley, Calif.: University of 
California, Berkeley, 2005). 

[22] J. Bradford Jensen and Lori G. Kletzer, "Tradable Services: 
Understanding the Scope and Impact of Services Offshoring" (July 14, 
2005, forthcoming in Brookings Trade Forum, 2005: Offshoring White- 
Collar Work--The Issues and the Implications, Lael Brainard and Susan 
M. Collins, ed.) 

[23] There is some consensus in the literature that openness to trade 
is positively correlated with economic growth. For a survey of this 
literature, see Andrew Berg and Anne Krueger, "Trade, Growth and 
Poverty: A Selective Survey," IMF Working Paper WP/03/30 (Washington, 
D.C.: International Monetary Fund, February 2003). However, there is 
also some disagreement. For an opposing view, see Francisco Rodriguez 
and Dani Rodrik, "Trade Policy and Economic Growth: A Skeptic's Guide 
to the Cross-National Evidence," NBER Working Paper 7081 (Cambridge, 
Mass.: National Bureau of Economic Research, April 1999). Robert 
Baldwin also reviews this literature in "Openness and Growth: What's 
the Empirical Relationship?" NBER Working Paper 9578 (Cambridge, Mass.: 
National Bureau of Economic Research, March 2003). 

[24] Proprietor's income is the income of noncorporate businesses. It 
is difficult to attribute to labor or capital. Some percentage of 
proprietor's income may be considered a wage paid by the business owner 
to themselves for their own labor, while some percentage may be 
considered a return on capital investment. 

[25] It should be noted that it is not always straightforward to 
determine the extent to which price declines can be attributed to the 
effects of trade. In part, this is because most traded products are 
manufactures and are generally subject to greater productivity growth 
(and hence steeper declines in costs) than nontraded products such as 
some services. 

[26] A summary of trade models and their applicability to services 
offshoring can be found in James R. Markusen, "Modeling the Offshoring 
of White-Collar Services: From Comparative Advantage to the New 
Theories of Trade and FDI," (paper prepared for the Brookings Trade 
Forum 2005, Offshoring White-Collar Work: The Issues and the 
Implications, Washington, D.C., May 12-13, 2005). 

[27] Ralph E. Gomory and William J. Baumol, Global Trade and 
Conflicting National Interests (Cambridge, Mass.: Massachusetts 
Institute of Technology, 2000). 

[28] In other scenarios in Baumol and Gomory's model, the U.S. loses 
its relative position in the global economy as trading partners start 
to catch up with U.S. living standards, although in absolute terms 
productivity improvements abroad are beneficial for the U.S. standard 
of living. In general the detrimental impact on the U.S. predicted by 
these models does not result specifically from services offshoring but 
from any developments abroad that lead to foreign firms competing 
successfully with U.S. exports. 

[29] Another paper that presents a theoretical example of this 
situation is Paul A. Samuelson, "Where Ricardo and Mill Rebut and 
Confirm Arguments of Mainstream Economists Supporting Globalization," 
Journal of Economic Perspectives, 18:3 (summer 2004): 135-146. See also 
Markusen, which summarizes several trade models in which productivity 
changes abroad lead to losses in the absolute or relative position of 
the U.S. in the global economy. 

[30] See, for example, Ron Hira's testimony before the U.S. House 
Committee on Small Business, The Globalization of White-Collar Jobs: 
Can America Lose These Jobs and Still Prosper? 108TH Congress (June 18, 
2003). 

[31] For example, see Economic Policy Institute, "Offshoring," EPI 
Issue Guide, www.epinet.org (June 2004, accessed on July 12, 2005). 

[32] For example, see Bivens. 

[33] Aggregate demand is the overall demand for output in the economy 
and reflects consumer and government spending as well as investment 
demand and net exports. These in turn are dependent on income, interest 
rates, investor and consumer confidence, and fiscal and monetary 
policy, among other things. It is thought that monetary policy, set by 
the Federal Reserve, can be used to stimulate aggregate demand during 
recessions so that the economy remains close to full employment. 
According to this view, while deviations from full-employment will 
occur in the short-run, in the long-run monetary policy can stabilize 
employment around the full-employment level. 

[34] The unemployment rate (or civilian unemployment rate) is the 
number of U.S. civilians aged 16 and over who are in the labor force 
but not employed, divided by the number of U.S. civilians aged 16 and 
over who are in the labor force. The denominator excludes persons not 
in the labor market (those under 16; those not employed but not looking 
for work). 

[35] The civilian employment rate (or employment to population ratio) 
is the number of U.S. civilians aged 16 and over who are employed, 
divided by the total number of civilians aged 16 and over in the 
population. The denominator includes persons not in the labor market 
(those not employed but not looking for work). 

[36] Congressional Research Service, Job Losses: Causes and Policy 
Implications, RL32194 (Washington, D.C.: Dec. 22, 2004). 

[37] Standard economic analysis predicts that trade deficits are not 
expected to generate unemployment. When the U.S. sustains a trade 
deficit, the U.S. is consuming goods and services of greater value than 
its GDP. This in turn means that other countries are necessarily 
supplying a net inflow of capital to the U.S., which permits the U.S. 
to pay for imports that exceed the value of its exports. The net 
capital inflow from foreign countries that accompanies a trade deficit 
is used in economic activities that generate jobs, such as direct 
investment in U.S. companies, or purchases of U.S. treasury debt which 
keeps U.S. interest rates low and thus stimulates domestic investment. 
The jobs generated by this net capital inflow should in theory offset 
the jobs that are lost when export industries decline. The BEA 
publishes a measure "Gross Domestic Purchases" that matches U.S. 
consumption of goods and services and can be compared to Gross Domestic 
Product. 

[38] See GAO-04-932. 

[39] Erica L. Groshen and Simon Potter, "Has Structural Change 
Contributed to a Jobless Recovery?" Current Issues in Economics and 
Finance 9:8 (New York, N.Y.: Federal Reserve Bank of New York, August 
2003). 

[40] Cyclical job loss, in which jobs are temporarily suspended due to 
short-term declines in demand, leads to ready re-employment of laid-off 
workers in the same industry (and often the same job) when demand 
increases. 

[41] Michael Klein, Scott Schuh and Robert Triest, "Job Creation, Job 
Destruction, and International Competition: A Literature Review," 
Federal Reserve Bank of Boston Working Paper 02-7 (Boston, Mass.: 
Federal Reserve Bank of Boston, December 2002) citing Carl Davidson, 
Lawrence Martin, and Steven Matusz, "Trade and Search Generated 
Unemployment," Journal of International Economics 48:2 (1999): 271-299. 

[42] Martin Neil Baily and Robert Z. Lawrence, "What Happened to the 
Great U.S. Job Machine? The Role of Trade and Electronic Offshoring," 
Brookings Papers on Economic Activity 2 (2004): 211-284. 

[43] See Groshen and Potter. 

[44] The MLS program does not collect statistics from small 
establishments--those employing fewer than 50 workers. In 
establishments employing 50 or more workers, MLS does not collect 
statistics on layoffs of less than 50 workers in a 5-week period. As a 
result, it collects data on only a portion of total layoffs. GAO 
previously reported that in 2003, the MLS survey covered only 4.6 
percent of all U.S. establishments and 56.7 percent of all U.S. 
workers. In addition, MLS data is collected by employer self-report, 
and some employers may be unwilling to provide information when 
interviewed about reasons for layoffs. See GAO-04-932. 

[45] By searching media sources for evidence of job shifts from the 
U.S. to other countries and corroborating the information with company 
records, Kate Bronfenbrenner and Stephanie Luce identified 48,417 job 
losses due to offshoring that occurred between January and March 2004. 
The authors believe that this methodology underestimates the number of 
job losses from offshoring because media reports do not capture all job 
losses. On the assumption that media reports capture two-thirds of job 
shifts to Mexico and one-third of shifts to other countries, the 
authors estimate that as many as 406,000 jobs were shifted overseas in 
2004. See Kate Bronfenbrenner and Stephanie Luce, The Changing Nature 
of Corporate Global Restructuring: The Impact of Production Shifts on 
Jobs in the U.S., China, and around the Globe, paper submitted to the 
U.S.-China Economic and Security Review Commission (Oct. 14, 2004). We 
did not assess the reliability of this or other studies that estimate 
the magnitude of job losses due to offshoring (see app. I). 

[46] Cynthia Kroll, "State and Metropolitan Area Impacts of the 
Offshore Outsourcing of Business Services and IT," Fisher Center 
Working Paper 293 (Berkeley, Calif.: University of California, 
Berkeley, Fisher Center for Real Estate & Urban Economics, 2005). 

[47] These studies are summarized in GAO-04-932. 

[48] See Kroll for a discussion of potential impacts of services 
offshoring on state and metropolitan areas. 

[49] See Jensen and Kletzer. 

[50] The Heckscher-Ohlin (HO) model explicitly models the wage rate 
received by different factors of production in each trading partner. 
Different factors of production may refer to workers of different skill 
levels, such as college-educated versus high school-educated workers, 
or the model can be used to examine the impact of trade on the income 
earned by owners of capital compared to wage earners. An argument 
similar to that which explains increased income inequality between 
workers of different skill levels can explain why increased trade with 
a developing country is likely to increase the return to capital (i.e., 
corporate profits) relative to wage income in the U.S. A developing 
country is likely to have a larger workforce relative to the amount of 
capital stock (financial resources and physical capital) than the U.S. 
Therefore, simple trade theory models predict that as trade between the 
U.S. and a developing country increases, the developing country will 
specialize in goods and services that are more labor intensive, while 
the U.S. will specialize in goods and services that are more capital- 
intensive. These patterns of specialization imply that in the U.S., 
corporate profits as a share of national income may rise, while 
employee compensation as a share of national income may fall, as demand 
for capital in the U.S. grows. 

[51] See Markusen. In addition, if the developing country does begin to 
compete in areas that employ higher-skilled and higher-paid U.S. 
workers, the factor-price equalization theorem predicts that income 
inequality in the U.S. would decline, due to falling relative wages 
among higher-skilled U.S. workers. A further caveat to the prediction 
that trade with a developing country is likely to increase income 
inequality in the U.S. that some economists have discussed is the 
potential for the emergence of intra-industry trade with developing 
country trading partners. These economists have argued that over time, 
as the economies of developing countries grow and become more similar 
to developed countries' economies, all trading partners will benefit 
from the emergence of intra-industry trade, where a country imports and 
exports goods in the same industry. Because intra-industry trade is not 
based on scarce and abundant factors of production, it is not expected 
to lead to large changes in the distribution of income within each 
country. 

[52] A summary of this literature is provided in Congressional Research 
Service, Foreign Outsourcing: Economic Implications and Policy 
Responses, RL32484 (Washington, D.C.: June 21, 2005). 

[53] Presidential Decision Directive/NSC-63 on Critical Infrastructure 
Protection defines critical infrastructure as "those physical and cyber-
based systems essential to the minimum operations of the economy and 
government. They include, but are not limited to, telecommunications, 
energy, banking and finance, transportation, water systems, and 
emergency systems, both governmental and private." 

[54] There are some restrictions in annual defense appropriations and 
authorization acts requiring certain DOD procurements to be performed 
by U.S. firms, for instance research contracts in connection with 
weapons systems and the Ballistic Missile Defense Program. See GAO, 
Federal Procurement: International Agreements Result in Waivers of Some 
U.S. Domestic Source Restrictions, GAO-05-188 (Washington, D.C.: Jan. 
26, 2005); also Defense Federal Acquisition Regulation Supplement, 
Subpart 225.70. 

[55] Defense Security Service, Technology Collection Trends in the U.S. 
Defense Industry 2002 (Alexandria, Va.: 2002). 

[56] GAO, Defense Acquisitions: Knowledge of Software Suppliers Needed 
to Manage Risks, GAO-04-678 (Washington, D.C.: May 25, 2004). 

[57] GAO, Export Controls: Post-Shipment Verification Provides Limited 
Assurance That Dual-Use Items Are Being Properly Used, GAO-04-357 
(Washington, D.C.: Jan. 12, 2004). This GAO review did not look at 
controls over service inputs specifically but found weaknesses in 
Commerce's post-shipment verification checks for confirming that 
controlled items sent to countries of concern arrive at their proper 
location and are used in compliance with the conditions of export 
licenses. 

[58] The State Department manages the regulation of defense articles 
and services, while the Commerce Department manages the regulation of 
dual-use items with both military and commercial applications. In most 
cases, Commerce's controls are less restrictive than State's. GAO has 
reviewed this export-control system, and found that Commerce has 
improperly classified some State-controlled items. See GAO, Export 
Controls: Processes for Determining Proper Control of Defense-Related 
Items Need Improvement, GAO-02-996 (Washington, D.C.: Sept. 20, 2002). 

[59] The Congressional Research Service reports that the intensity of 
government-funded basic research has fallen from about 0.7% of GDP in 
1953 to about 0.2% of GDP in 2002. See Congressional Research Service, 
RL 32484. 

[60] In a review of the research and development tax credit, GAO 
concluded that the credit's net benefits to society are uncertain. 
Private sector studies concluded that during the 1980's each dollar of 
foregone tax revenue due to the credit resulted in a dollar of spending 
on research, but we raised questions about the methodologies of these 
studies. In addition, these studies did not examine the benefits gained 
by society from research stimulated by these credits or the costs to 
society from the collection of taxes required to fund the credits. See 
GAO, Tax Policy and Administration: Review of Studies of the 
Effectiveness of the Research Tax Credit, GAO/GGD-96-43 (Washington, 
D.C.: May 21, 1996). 

[61] GAO recently examined federally-funded higher education programs 
in these fields. See GAO, Higher Education: Federal Science, 
Technology, Engineering, and Mathematics Programs and Related Trends, 
GAO-06-114 (Washington, D.C.: Oct. 12, 2005). 

[62] The Department of the Treasury is required to assess annually 
whether foreign countries are manipulating their currencies for trade 
advantage. GAO examined the Treasury's process for making these 
assessments and reported that Treasury has not found that either China 
or Japan meet all legal criteria for currency manipulation. However, 
GAO also noted that many experts have concluded that China's currency 
is undervalued, though by widely varying amounts, and some maintain 
that undervaluation cannot be determined. See GAO, International Trade: 
Treasury Assessments Have Not Found Currency Manipulation, but Concerns 
about Exchange Rates Continue, GAO-05-351 (Washington, D.C.: Apr. 19, 
2005). 

[63] GAO has previously found that the U.S. government lacks a 
coordinated strategy to handle the growing workload involved in 
monitoring and enforcing trade agreements. See GAO, International 
Trade: Further Improvements Needed to Handle Growing Workload for 
Monitoring and Enforcing Trade Agreements, GAO-05-537 (Washington D.C.: 
June 30, 2005). More specifically, GAO has found limitations in the 
World Trade Organization's (WTO) intended mechanism to review China's 
compliance with its trade commitments and made recommendations for key 
agencies to improve their management of China's WTO compliance. See 
GAO, U.S.-China Trade: Observations on Ensuring China's Compliance with 
World Trade Organization Commitments, GAO-05-295T (Washington D.C.: 
Feb. 4, 2005). 

[64] In a previous study, GAO concluded that a revaluation of the 
Chinese renminbi would have implications for various aspects of the 
U.S. economy--with both costs and benefits--although the impacts are 
hard to predict. See GAO-05-351. 

[65] Pub. L. No. 100-379; 29 U.S.C. § 2101-2109. 

[66] Pub. L. No. 93-618; 19 U.S.C. § 2271. 

[67] The Trade Act of 2002 that reformed the TAA program created a 
demonstration wage insurance benefit for workers 50 years of age and 
over in the TAA program who meet a series of criteria. Pub. L. No 107- 
210 § 124; 19 U.S.C. § 2318. 

[68] See GAO-04-678. 

[69] We are examining the occurrence and nature of services offshoring 
in several government human services programs and the extent to which 
legal restrictions limit the ability to procure services from foreign 
locations. We have also examined impacts of legislation restraining 
imports. See, for example, GAO, Maritime Issues: Assessment of the 
International Trade Commission's 1995 Analysis of the Economic Impact 
of the Jones Act, B-279386 (Washington, D.C.: Mar. 6, 1998). This study 
examined legislation requiring that, with few exceptions, cargo 
transported by water between points in the U.S. be carried on U.S.- 
built, -registered, -owned, and -crewed ships. 

[70] Many countries do not tax the foreign-source income of their 
resident corporations. Consequently, in the absence of deferral, these 
foreign-based corporations would often have an advantage when competing 
against U.S.-owned subsidiaries operating in a third country. 

[71] GAO, Tax Administration: Potential Impact of Alternative Taxes on 
Taxpayers and Administrators, GAO/GGD-98-37 (Washington, D.C.: Jan. 14, 
1998); Congressional Research Service, The Flat Tax, Value-Added Tax, 
and National Retail Sales Tax: Overview of the Issues, RL32603 
(Washington, D.C.: Dec. 14, 2004). 

[72] Rosemary Batt, Virginia Doellgast, and Hyunji Kwon, "A Comparison 
of Service Management and Employment Systems in U.S. and Indian Call 
Centers" and Frank Levy and Ari Goelman, "Offshoring and Radiology," 
(prepared for the Brookings Trade Forum 2005: Offshoring White-Collar 
Work--The Issues and the Implications, Washington, D.C., May 12-13, 
2005); Clair Brown and Greg Linden, "Offshoring in the Semiconductor 
Industry: A Historical Perspective," Berkeley-Doshisha Employment and 
Technology Working Paper Series cwts-02-2005 (Berkeley, Calif.: 
University of California, Berkeley, 2005). 

[73] Martin Baily and Robert Lawrence use data from U.S. and Indian 
trade statistics, as well as additional sources, to estimate the number 
of jobs lost due to offshoring in both the manufacturing and services 
sector between 2000 and 2003. Their results suggest that offshoring did 
not cause large enough job dislocations to be a significant source of 
unemployment in either services or manufacturing. See Martin Neil Baily 
and Robert Z. Lawrence, "What Happened to the Great U.S. Job Machine? 
The Role of Trade and Electronic Offshoring," Brookings Papers on 
Economic Activity 2 (2004): 211-284. 

[74] GAO, International Trade: U.S. and India Data on Offshoring Show 
Significant Differences, GAO-06-116 (Washington, D.C.: Oct. 27, 2005). 

[75] See, for example, Brookings Institution, "Services Offshoring: 
What Do the Data Tell Us?" Summary of Data Workshop (Washington, D.C.: 
June 22, 2004); Office of Senator Joseph Lieberman, Data Dearth in 
Offshore Outsourcing: Policymaking Requires Facts (Washington, D.C.: 
December 2004). 

[76] We relied particularly upon literature collected for GAO, 
International Trade: Current Government Data Provide Limited Insight 
into Offshoring of Services, GAO-04-932 (Washington, D.C.: Sept. 22, 
2004). 

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