The Muddles over Outsourcing

I n the early 1980s, “outsourcing ” typically referred to the situation when firmsexpanded their purchases of manufactured physical inputs, like car compa-nies that purchased window cranks and seat fabrics from outside the firm rather than making them inside. But in 2004, outsourcing took on a different meaning. It referred now to a specific segment of the growing international trade in services. This segment consists of arm’s-length, or what Bhagwati (1984) called “long-distance, ” purchase of services abroad, principally, but not necessarily, via electronic mediums such as the telephone, fax and the Internet. Outsourcing can happen both though transactions by firms, like phone call centers staffed in Bangalore to serve customers in New York and x-rays transmitted digitally from Boston to be read in Bombay, or with direct consumption purchases by individuals, like when someone hires an offshore firm to provide plans for redesigning or redecorating a living room. Thus, in February 2004, the members of President Bush’s Council of Economic Advisers stated the following: “Outsourcing of professional services is a prominent example of a new type of trade ” (Mankiw, Forbes and Rosen, 2004). The chair of the CEA, Gregory Mankiw, made a similar point in a press interview (Andrews, 2004): ”I think outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run. We’re very used to goods being produced abroad and being shipped here on ships or planes. What we are not used to is services being produced abroad and being sent here over th