Offshoring and Outsourcing in the United States: Pros & Cons

This article is an excerpt from the Shortform book guide to "The World Is Flat" by Thomas L. Friedman. Shortform has the world's best summaries and analyses of books you should be reading.

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What are offshoring and outsourcing? Are they good or bad?

In The World Is Flat, Thomas L. Friedman examines the forces of globalization, where they came from, how they’re changing the world, and what the globalized future might hold. He discusses new forms of collaboration that accelerate globalization. Those developments include outsourcing and offshoring.

Read more to understand how offshoring and outsourcing in the United States contribute to globalization and for a brief discussion on the pros and cons of outsourcing in particular.

Offshoring & Outsourcing in the United States

Offshoring and outsourcing in the United States are hot topics. We’ll look at what these practices are and how they’re part of a connected world.

Outsourcing is when a company pays someone else—an individual, group, or another company—to do a specific job that it previously did in-house. Friedman explains that, when the world became connected by the internet, the outsourcing of jobs grew cheaper because communicating and collaborating over long distances became easier. For example, around 2000, outsourcing from America to India became popular. American companies paid Indian companies to help with their call centers, business operations, or any other form of work that could be digitized. Because of this, American and Indian companies are now more intertwined.

Globalization also accelerated offshoring, which is a little different from outsourcing. Instead of allowing a third party to help with a function or process of a company, offshoring sends in-house jobs overseas. The most prominent example of this is the common practice of sending manufacturing jobs to China. As China opened itself up to the world market, it became a global hotspot for offshoring jobs, as other countries can’t compete with China’s low-cost manufacturing.

The outsourcing and offshoring of U.S. jobs are generally considered to be negative aspects of globalization, as jobs are leaving American soil. But Friedman argues that it isn’t quite that simple. Cheap goods made in China have saved the American consumer hundreds of billions of dollars. In addition, American companies have seen increased profits because of the practice, which allows them to grow their businesses and hire more workers in the US.

Pros and Cons of Outsourcing

Friedman admits that the outsourcing and offshoring of jobs is one of the most controversial aspects of globalization, and while he argues that the pros outweigh the cons, there are contradictory reports on how damaging it is to a country’s economy.

The offshoring of manufacturing jobs in particular is a great concern of economists and politicians, as they have historically provided stable middle-class jobs to many Americans. From 1998 to 2020, an estimated 5 million U.S. manufacturing jobs were lost due to globalization. A 2016 study suggests that this could have a big impact because it found that when U.S. manufacturing loses $1 of growth to China, the entire U.S. economy loses $6 of growth.

Other economists, however, feel the drawbacks of offshoring jobs aren’t that serious. They argue that first, the number of jobs lost to offshoring is small when compared to the size of the labor force. Second, most trade is still done between high-income countries, so earning inequality shouldn’t be affected. Third, though there are fewer manufacturing jobs than in the past, there has been a rise in the earnings of skill-based jobs. For those with a college degree, there are more opportunities to find jobs outside of manufacturing.

Offshoring and Outsourcing in the United States: Pros & Cons