*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 198  April 24, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
How to handle the job-offshoring backlash?
* <#m_-2605237918357231511__edn1>
Terutomo Ozawa** <#m_-2605237918357231511__edn2>

Contrary to trade theory, emerging markets’ comparative advantages in
labor-intensive manufacturing are seldom exploitable immediately.  They
usually need support in such areas as financing, marketing and labor
training. In this age of globalization, help comes from multinational
enterprises (MNEs) that eagerly exploit existing and potential comparative
advantages in search of low-cost locations for their supply chains.  They
can provide those missing elements in one package. They both supplement
comparative advantages fully and amplify their strength through their
superior capabilities. This makes low-wage manufactures even more
competitive and reinforces an export-driven catch-up.

The flipside of all this, however, is that labor-intensive manufacturing of
MNEs’ home countries necessarily suffers even more job losses, further
damaging the affected communities. Replaced capital is relatively footloose
and reusable across borders (as MNEs’ operations illustrate).  However,
replaced labor is not, due to a variety of mobility constraints.
Undoubtedly, consumers benefit from low-cost imports—but unemployed
consumers share little in this benefit.  The faster the pace of
MNE-assisted catch-up in emerging markets, the greater is the drawback for
home-country workers and their communities. MNEs’ low-wage-seeking drive
helps maximize profits but diminishes social welfare in home countries—to
an extent of stirring a political backlash.

Factory jobs, once the backbone of the US middle class, have decreased due
to a shift largely to China and Mexico, mostly at the hands of MNEs. To be
sure, automation has played a role as well, and will even more so in the
future. But US factories are increasingly relying more on foreign robotics,
[1] <#m_-2605237918357231511__edn3> thereby missing an opportunity to
create high-skilled jobs at home. Besides, robotics operators and related
workers are in short supply in the US, calling for more focused
skill-training. Europe, too, frets about job losses, as does Japan.  Yet,
job-offshoring damages the US most. As the world's richest, most open
market, it is flooded with imports (many outsourced by MNEs) from emerging
markets. Hoping that their catch-up would create new export markets,
advanced economies have assisted emerging markets through aid and tolerated
the ever-rising costs of trade adjustment.

MNEs’ job-offshoring and employment of foreign high-tech workers are the
easiest way-out to tackle high US wages and skilled-labor shortages. Other
avenues include efficiency-raising strategies (e.g., cutting-edge robotics
and skill retraining), but these take more time and efforts. Also, MNEs may
retort that overregulation and high corporate taxes at home hamper these
home-based solutions.

Resource-rich countries extract concessions from access-seeking MNEs.
Similarly, catching-up economies (still semi-open) impose a slew of
measures (e.g., joint ventures, tech-transfers, local procurement) on
market-seeking MNEs. China uses its market most effectively in this
regard.  Analogously, advanced countries’ rich markets should serve equally
as a bargaining tool in trade negotiations.

Past European and US experiences suggest how to encourage job-onshoring.
First, import tariffs induce “tariff-jumping factories.” For instance, the
European Common Market (benefitting insiders)—and later, the European Union
(further disadvantaging outsiders)—lured MNEs' factories as new insiders in
such an expansive market.  The North American Free Trade Area likewise
attracted investment. Second, diplomatically smart “voluntary export
restraints”/“orderly marketing agreements” (characterized by “voluntarism”
and devoid of retaliation-risk) have brought factories to both regions.
Tariffs, attractive markets and voluntarism are three key job onshoring

President Trump's jawboning (“produce if you sell here, or else tariffs”)
is based on these inducers as a short-run expediency. His long-term growth
strategy (tax-cuts, deregulation, infrastructure building), if successful,
will make the US economy stronger, encouraging even more onshoring.  In
fact, his approach has already made MNEs “voluntarily” pledge more *new*
jobs, though Martin Wolf argued that this “will not bring back [*old*]
jobs.”[2] <#m_-2605237918357231511__edn4> Nevertheless, a better expedient
(without tariff threats and retaliation) may be ad hoc compacts that make
MNEs “voluntarily” restrain job-offshoring and/or expand domestic
production under case-specific conditionalities. This gives more time for
adjustment, and may be more congenial to MNEs (including fast
market-capturing Chinese MNEs in advanced economies). Also, advocacy of
corporate social responsibility helps home-country workers. For example,
letting them train foreign workers before being themselves replaced by
those same workers is unconscionable—unless new jobs are guaranteed. Given
a growing shortage of skilled workers in the US, enterprises should be
mandated to participate in developing a pool of skilled local workers.

Presently, trade-adjustment-assistance programs (skill-retraining,
community revival) are the only long-lasting measures in the US and
Europe.  However, they have proved unsatisfactory—despite repeated tweaking
over the past 50 years in the US—although Wolf still considered them “the
best response.” Exonerated from the social costs, MNEs may have been
encouraged to offshore even more.

It is time to rethink how best to handle the job-offshoring backlash, now
that multilateralism is declining and a new era of bilateral pacts,
including between nationalistic states and globalist MNEs, is

* <#m_-2605237918357231511__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
** <#m_-2605237918357231511__ednref2> Terutomo Ozawa ([log in to unmask])
is an Emeritus Professor of Economics, Colorado State University, and a
Research Associate, Center on Japanese Economy and Business, Columbia
Business School. This *Perspective* is based partly on Terutomo Ozawa, *The
Evolution of the World Economy: the Flying-Geese Theory of Multinational
Corporations and Structural Transformation* (Northampton, MA: Elgar, 2016).
The author is grateful to Yair Aharoni, Stephen Kobrin and Manuel Montes
for their helpful peer reviews. *Columbia FDI Perspectives (ISSN 2158-3579)
is a peer-reviewed series.*
[1] <#m_-2605237918357231511__ednref3> "Driving U.S. factories:  foreign
robotics," *Wall Street Journal*, Mar. 27, 2017.
[2] <#m_-2605237918357231511__ednref4> "Tough talks will not bring back
jobs," *Financial Times*, Jan. 31, 2017.

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Terutomo Ozawa, ‘How to handle the
job-offshoring backlash?’, **Columbia FDI Perspectives, No. 198, April 24,
2017. Reprinted with permission from the Columbia Center on Sustainable
Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 197, Ana Arias Urones and Ashraf Ali Mahate, “FDI sectorial
   diversification: the trade-transport-tourism nexus,” April 10, 2017.
   - No. 196, John Gaffney, “The Equal Representation in Arbitration
   Pledge: two comments on its scope of application,” March 27, 2017.
   - No. 195, Laza Kekic, “FDI to the UK will remain robust post-Brexit,”
   March 13, 2017.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *In March 2017*, CCSI submitted comments
   to the ICSID Secretariat regarding proposed revisions to ICSID's
   arbitration rules. CCSI's submission provided illustrative suggestions for
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   including: recognizing and safeguarding of the rights and interests of
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   - CCSI, in partnership with the Danish Institute for Human Rights and
   the Sciences Po Law School Clinic recently published a discussion paper on
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   long project
   supported by The Tiffany & Co. Foundation, and is based on extensive
   desktop research, interviews with 49 people with relevant experience, as
   well as a roundtable that brought together over a dozen stakeholders and
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   recommendations. The discussion paper is also summarized in this briefing
   - *In April 2017*, CCSI launched a series of short videos from the
   authors of Rethinking Investment Incentives: Trends and Policy Options
   (published by Columbia University Press in July 2016), summarizing the
   important messages from each chapter. New videos will be posted weekly

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2017 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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