Comments on Outsourcing

A message from a student:

Hi Professor Mickler,

I’ve got a question for you. Do you think offshoring lowers our ability as a nation to face enemies? For example Our military uses spare parts from Japan and also uses uniforms made in foreign countries. Since our textile industry in all but non- existent. Could these countries not hold back on these needed supplies in a future conflict and hurt our national security. This is just a thought of what offshoring can affect.

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Well, I’ll give you my opinion and you can take that for what it’s worth (grin).

Outsourcing (offshoring/nearshoring) is a symptom of two economic realities:

1. Given the state of telecommunications, multilateral trade, and transportation, national boundaries bear little significance in isolating socio-economical growth. Globalization is a natural extension of the interconnectedness we have as societies and cultures now.

2. Capital will always transfer to those who can provide a common good or service, at the same quality as any other, at a lower price.

So long as these principles hold true – that political hegimony does not attempt to engage in cultural and economic protectionism thus isolating itself from the world, and, the WTO is still regarded as a positive mechanism by its participants – then outsourcing is a natural extension of what consumers and societies desire.

The US military is not a private institution and isn’t swayed by the profit motive like private industry is. The military doesn’t have quarterly reports, the SEC breathing down its neck, or an accountability to public shareholders. Therefore, the military doesn’t require an “ROI”, so to speak, on its capital investments, although there are practical limitations on what $390 billion a year will provide (grin). They are constrained by budget. The military need not justify anything – it could, if it wanted to, demand that its contractors and internal operations source from domestic firms exclusively.

However, I would reason that this mandate would inflate costs and it’s reasonable to presume the military wants to extend its buying power. The contractors to the US military would only be so happy to oblige if the military forced 100-percent domestic sourcing, but the reality is that costs would increase and scarcity being what it is, somebody is rationally deciding that cost containment is more significant than the risk of using outsourced components and services. Therefore, sourcing from “our enemies” is the military’s _conscious_ decision, and they do it for the same reasons that you and I shop at Wal-Mart. We want to extend our buying power.

So long as those economic truths are static, and the decision-makers inside of the military are rational, I don’t foresee that changing unless it becomes a matter of strategic priority that over-rode rational decision-making.

Personally, no, I don’t see it as a competitive or strategic disadvantage to US interests. The US outspends our closest competitor on military spending 10:1; the application of that spending by the best trained military on the planet is (bar none) of more strategic importance than where the supplies and services come from. I think there’s a more disasterous consequence awaiting for us in the consumer economy: what happens if we engage China in a conventional conflict and Americans are unable to access cheap hair spray, or, plastics, or, consumer electronics? The more significant impact to releasing the dogs of war in an interconnected, global economy is the reality that we’d cripple our ability to _fund_ a military effort in the first place; we’d hurt ourselves. Thus, one could stand to reason the importance of a vast central military to engage other nation-states when geopolitical, economic, and social interconnectivity tie us so close together that it’d be like attacking _ourselves_ (grin).

R

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