The Washington Post’s Tom Hamburger thrust offshoring into the spotlight when he used Bain Capital’s SEC filings to show how the private equity firm pioneered the trend towards offshoring American jobs to cheaper labor centers in China and India. In the context of an election in which unemployment is a major issue, this exposé couldn’t have come at a worse time for Mitt Romney.
Over the past two decades, American companies have dramatically expanded their overseas operations and supply networks, especially in Asia, while shrinking their workforces at home. McKinsey Global Institute estimated in 2006 that $18.4 billion in global information technology work and $11.4 billion in business-process services have been moved abroad, with the loss of over three million jobs. The US is not alone, and it is now common for companies that do business in rich western countries to offshore so-called back-office operations, like accounting, IT, processing insurance claims, data entry and even interpreting X–rays to low-wage countries. Phone a help line and you are likely to be connected to a call center in Manila or Bangalore.
The idea of sourcing cheap products from low-wage countries was pioneered in the 1970s by companies like Nike. From the start, Nike decided that its core business was not making sport shoes, but rather marketing and retailing sports shoes it imported from Japan. Unhappy with escalating prices from its supplier, in 1975, it sourced its stock from Taiwan and then South Korea in 1977. In 1980, Nike was one of the first Western companies to offshore in China, and then continued its pursuit of low-cost manufacturing countries by moving to Thailand and Indonesia. More recently it has offshored to Vietnam.
One of the innovations embedded in offshoring that companies like Nike use is sophisticated logistical management techniques to create “production networks,” allowing it to exercise power and coordination without owning the means of production, transport or processing facilities. This is the best of all worlds. By separating the physical production of goods from proprietary control over the design, distribution and marketing, they are able to retain de facto command over production. Without giving up control, transnational corporations can easily substitute one contractor for another, giving them a high level of flexibility and power over contractors. Just the threat of taking their business elsewhere means that a transnational corporation has put itself in a strong position to exploit the vulnerability of the small companies that make up its supply chain.
These changes to the business ecology make abuses of the strong against the weak inevitable, as we have seen in the growth of sweatshops. As transnational corporations can move their operations quickly from one contract to the next and from one country to the next, allowing them to extract the best deals, there is pressure on contractors to compete by driving down wages, demand unpaid overtime, operate non-unionized workplaces, and create abusive work environments to extract the last drop of productivity from an exploited workforce.
Sadly, there is no lack of horror stories of abuses conducted in sweatshops. In the Northern Mariana Islands, for example, allegations have been made that women imported from China, Bangladesh and Philippines work in conditions akin to indentured servitude as they pay off middlemen who arranged their visas into this US dependency. Once there, they live in squalid conditions, forced to work long hours and, if they complain, they can be summarily sacked, which means facing termination of their work visa and deportation. In some instances, the conditions are Dickensian, as a 1998 investigation by the Department of Interior Office of Insular Affairs included complaints by a number of Chinese garment workers who reported that if they became pregnant, they were “forced to return to China to have an abortion or forced to have an illegal abortion.”
Such stories have resulted in consumer outrage and boycotts of labels associated with sweatshops. In response to this backlash, companies like The Gap, Levi Strauss, Reebok and Nike have implemented codes of practices that are intended to stop child labor, unpaid overtime and other exploitative practices associated with sweatshops. Many of these are even audited to add to their credibility.
The problem is that these improvements are just an illusion. A study of Swedish and Danish toy companies found that contractors were put into an impossible position:
[P]urchasing companies are not willing to share the costs of their ethical demands. The suppliers are under great pressure due to low prices and the demand for shorter delivery times … to cheat the inspections of the companies’ demands.
This charade is played out with devices such as producing two sets of books to hide low wages and unpaid overtime. Also, workers are intimidated into keeping quiet about poor working conditions, and risk losing their jobs if they report breaches of code to auditors. The system cannot be totally fooled, and contractors are left with additional costs associated with these imposed ethical codes, leaving them with little choice than to further reduce costs, which means squeeze their employees even more.
For neoliberals, offshoring is part of the next industrial revolution. Putting the case forward is Professor N. Gregory Mankiw, a Harvard professor, who said that offshoring is only “the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith….More things are tradable than were tradable in the past, and that’s a good thing.” It is not a good thing, however, when offshoring allows companies to profit from human rights abuses.