Offshoring of Services: An Overview of the Issues
Published: 2005-11-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Much attention has focused on the "offshoring" of services to lower-wage locations abroad. Offshoring generally refers to an organization's purchase of goods or services from abroad that were previously produced domestically. Extensive public debate has arisen about both the potential benefits of services offshoring, such as lower consumer prices and higher U.S. productivity, as well as the potential costs, such as increased job displacement for selected U.S. workers. In response to widespread congressional interest, GAO conducted work under the Comptroller General's authority to help policy makers better understand the potential impacts and policy implications of services offshoring. This report: (1) provides an overview of experts' views on the potential impacts of services offshoring, (2) describes the types of policies that have been proposed in response to offshoring, and (3) highlights some key areas where additional research might help advance the debate about offshoring. In its comments, the Department of Commerce generally agreed with the findings of this report. Commerce, Treasury, and the Office of the United States Trade Representative also provided technical comments that have been incorporated as appropriate.
section_title: What GAO Found
paragraphs: Analysts of the offshoring phenomenon have expressed a range of views about the likely impacts of offshoring on four broad areas. The differing views reflect several factors: the fact that services offshoring is a relatively recent development whose impact is not fully known, the limitations of available data on offshoring, and different theoretical expectations about how services offshoring will impact the U.S. economy. The average U.S. standard of living: Traditional economic theory generally predicts that offshoring will benefit U.S. living standards in the long run. However, some economists have argued that offshoring could harm U.S. long-term living standards under certain scenarios, such as if offshoring undermines U.S. technological leadership. Employment and job loss: While economic theory generally predicts that offshoring will have little effect on overall U.S. employment levels in the long-run, there is widespread recognition that pockets of workers will lose jobs due to offshoring, though there is disagreement about the expected magnitude of job loss and implications for displaced workers. Distribution of income: Some economists maintain that offshoring could increase income inequality in the U.S., while others argue that changes in the income distribution are driven primarily by factors other than offshoring, such as technological change. Security and consumer privacy: Experts express varying degrees of concern about the impact of services offshoring on the security of our national defense system and critical infrastructure--such as utilities and communication networks--as well as the privacy and security of consumers' financial and medical information. A wide range of policies has been proposed in response to concerns about offshoring and its potential effects. These proposals can be categorized into four areas by the concerns they seek to address: (1) improving U.S. global competitiveness, (2) addressing effects on the U.S. workforce, (3) addressing security concerns, and (4) reducing the extent of offshoring. Some analysts have recommended policies in more than one area. Determining appropriate policy responses to the offshoring phenomenon is challenging due to the limited state of knowledge about the extent and impacts of offshoring. Nonetheless, there are some key areas where additional research might help advance the debate, such as trends in the wages and skill levels of jobs being offshored, reemployment experiences of workers displaced by offshoring, and the extent to which current laws and practices in different sectors of the economy mitigate any increased security-related risks posed by offshoring. In the face of limited federal data, researchers have begun using a variety of approaches to examine such areas.

section_title: Letter
paragraphs: Although “offshoring” has existed for decades in the manufacturing sector,  recently concerns have been raised about the emergence of services  offshoring. Offshoring generally refers to the practice, by either U.S.  companies or government entities, of replacing goods or services  previously produced domestically with goods and services produced  abroad. Advances in information technology (IT) and developments in the  management of business processes, coupled with a large pool of educated  workers in other countries, allow companies to move services work  outside of the U.S. as part of a larger trend toward global interdependence.  For example, U.S. companies are now able to move software  programming, accounting, or telephone call center services to lower-wage  locations such as India, the Philippines, and Eastern Europe. While U.S.  government data have limitations, these data indicate that in recent years  the imports of services associated with offshoring have been growing.  This has contributed to heightened public debate about both the potential  benefits of services offshoring, such as lower consumer prices and higher  U.S. productivity, as well as the potential costs, such as increased job  displacement for U.S. workers.
Services offshoring raises issues on a wide array of topics, including the  economy, workforce, consumer privacy, and national security. Moreover,  various pieces of federal and state legislation have been introduced, such  as bills to restrict the offshoring of some government services or to  provide more assistance for displaced workers. In response to widespread  congressional interest, we have prepared this report under the  Comptroller General’s authority to help the Congress understand and  examine the potential impacts and policy implications of services  offshoring. As this report may prove helpful in the deliberations of  committees with oversight responsibilities or jurisdiction over issues  raised by offshoring, we have addressed this report to these committees.  Although this report focuses on services offshoring, much of our  discussion is applicable to offshoring in the manufacturing sector as well.
This report addresses three broad areas. First, it provides an overview of  experts’ views on the potential effects of offshoring. Where possible, we  identify empirical research that provides support for various views. Where  experts express different opinions on the potential effects of offshoring,  we highlight the key issues that underlie the debate. However, the report  does not attempt to resolve such differences in views. Second, the report  provides an overview of the various types of policies that have been  proposed in response to offshoring. We generally categorize policy  proposals on the basis of the broad concerns that they seek to address,  and we provide illustrative examples of policies that have been proposed.  Third, the report highlights some key areas where additional research  might advance the debate about the effects and policy implications of  offshoring. Our discussion identifies some relevant data sources and  potential approaches for such research.
To carry out this study, we conducted an extensive literature review and  interviewed a wide range of experts, often with conflicting points of view,  from academia, government, think tanks, industry groups, and labor  groups (see app. II for a list of experts interviewed). In addition, we  attended several conferences to hear presentations on services offshoring  and dialogue with experts during the course of our work. We conducted  our review from May 2004 through November 2005 in accordance with  generally accepted government auditing standards. See appendix I for a  detailed discussion of our scope and methodology.
subsections: section_title: Background
subsections: section_title: Defining Offshoring
paragraphs: Offshoring generally refers to a company’s purchases from abroad  (imports) of goods or services that were previously produced  domestically. A company may offshore services either by purchasing  services from another company based overseas or by obtaining services in- house through an affiliate located overseas. For example, a U.S.-based  company might stop producing parts of its accounting and payroll services  in-house and instead outsource them to a foreign-based company. A U.S.- based multinational company might also offshore by moving parts of its  accounting and payroll services from its domestic operations to its foreign  affiliate, thus keeping the services in-house. Importing services that had  previously been acquired domestically or relocating services to foreign  affiliates both can result in the displacement of U.S. service production  and employment, though as we discuss later, will likely have other  economic effects, such as on consumer prices and productivity.
However, other business activities that do not directly result in the  displacement of U.S. workers are sometimes included in broader  definitions of offshoring. Offshoring could include other business activities  that may result in foregone job creation domestically but would not result  in job losses. For example, a U.S.-based company might expand its  accounting and payroll services through a foreign company or affiliate, but  do so without affecting its U.S. workforce.
Broader definitions of offshoring sometimes include the movement of  production offshore. This definition of offshoring focuses on U.S.  companies’ investing in overseas affiliates. Offshoring defined in this way  could but would not necessarily result in the displacement of U.S. service  production or employment. For example, a U.S.-based company investing  in its overseas affiliate to produce accounting and payroll services to sell  to other companies abroad might do so without affecting its production  and employment levels in the U.S.
section_title: Types of Services Associated with Offshoring
paragraphs: Types of services associated with offshoring tend to be those that are  capable of being performed at a distance and whose product can be  delivered through relatively new forms of advanced telecommunications.  Examples of these business functions include software programming and  design, call center operations, accounting and payroll operations, medical  records transcription, paralegal services, and software research and  testing.
More than three-quarters of U.S. private-sector employees are in service- providing industries; however, not all services jobs are likely to be at risk  from offshoring. Many services jobs, such as child care providers and  hairdressers, require face-to-face contact with customers. Other jobs, such  as transportation workers, construction workers, and auto mechanics,  require hands-on contact with physical equipment. In addition, some work,  such as marketing and creative design, may be done more efficiently and  productively in close proximity to customers and other workers.
section_title: U.S. Trade and Foreign Direct Investment
paragraphs: While government data on trade and foreign direct investment offer  limited insight into the extent of offshoring, the data provide some  evidence that services imports are growing. Trade data from the  Department of Commerce’s Bureau of Economic Analysis (BEA) show  that imports of services associated with offshoring are growing. For  example, U.S. imports of business, professional, and technical services  grew from $20.8 billion in 1997 to $40.7 billion in 2004—an increase of  about 10% per year. It is important to note that these import data show  that U.S. entities have been purchasing these services offshore, but the  data do not indicate whether these entities had previously been  purchasing these services from domestic U.S. sources.
The U.S., Canada, and the United Kingdom are among the world’s leading  exporters of services. According to World Trade Organization data, the  U.S. was the world’s largest exporter of commercial services in 2004. BEA  data show that in 2004 Canada and the United Kingdom accounted for   42 percent of the U.S.’s imports of unaffiliated business, professional, and  technical (BPT) services, or BPT services traded between firms that are  separate entities from each other.
The U.S. currently exports more services than it imports and therefore  maintains a trade surplus in services overall. In 2004, this surplus was  nearly $48 billion, according to BEA data. However, since 1997, the trade  surplus in services has generally been shrinking. At the same time, the  overall trade deficit has generally been expanding (see fig. 1), though  imported services comprise a small share (about 17 percent) of total U.S.  imports of goods and services.
BEA data on direct investment abroad capture U.S. multinational  companies’ establishment of affiliates abroad, including establishment of  affiliates to produce services. The data suggest that most services  produced abroad by U.S. majority-owned foreign affiliates are sold to  foreign markets rather than to the U.S. In addition, the data show that   U.S. direct investment abroad tends to be concentrated in other developed  countries, rather than in developing countries frequently associated with  services offshoring. For example, according to BEA data, 61 percent of  U.S. direct investment abroad in 2004 took place in the European Union,  Canada, and Japan. In the same year, U.S. direct investment in developing  countries that are frequently cited as suppliers of offshore services (e.g.,  India, the Philippines, Malaysia, and China) was relatively small—about   1 percent or less of total U.S. direct investments in each case. In addition,  BEA data from 2003 show that over nine-tenths of services sold by U.S.- majority-owned nonbank foreign affiliates are sold to foreign markets  rather than to the U.S.
BEA data also show that the U.S. receives large amounts of direct  investment by other countries. In 2004, the U.S. received nearly $96 billion  in foreign direct investment. The countries that are the largest recipients  of U.S. foreign direct investment abroad are also the largest foreign direct  investors in the U.S., with the European Union, Japan, and Canada  accounting for 82 percent of foreign direct investment in the U.S. Foreign  firms investing in the U.S. employ U.S. workers. U.S. affiliates of foreign  multinational corporations employed 5.3 million U.S. workers in 2003,  accounting for 5 percent of total U.S. employment in private industries.
section_title: Enabling Factors and Incentives for Offshoring
paragraphs: Firms have been offshoring long before the recent trend in services  offshoring. In previous decades, U.S. manufacturing companies were  motivated to offshore because of the low costs and availability of skilled  labor, production and supply networks in some developing countries, and  reductions in cost of transporting goods. At the same time, U.S. companies  divided their production processes into discrete pieces, which allowed  them to offshore some of the components. As a result, some businesses  offshored total production, and others offshored parts of the production  process. Firms generally retained higher-end, higher-skilled services  functions in the U.S., such as management, finance, marketing, and  research and development.
Offshoring has recently expanded into services due to three key factors.  First, technological advances, such as advances in telecommunications  and the emergence of the Internet, have enabled workers in different  locations in the world to communicate and be connected electronically  and has also facilitated the digitization and standardization of activities  needed to complete business processes. These changes in turn have  allowed business processes to be divided into smaller components, some  of which could be done in different locations. For example, standardized  software has made it possible for firms to outsource financial or human  resources activities to a separate overseas company that performs them  for many clients, rather than handling the functions internally. Thus, in  many cases, the offshoring of services constitutes an outgrowth of  outsourcing business functions. Second, countries such as India, China,  Russia, and much of Eastern Europe have increasingly opened their  borders to the global economy. Third, other countries have highly  educated populations with the technical skills for performing services and  technology-related work.
According to several business studies, a primary reason that organizations  engage in offshoring is to reduce costs. The cost savings from offshoring  are primarily the result of differences between the U.S. and developing  countries in the unit cost of labor, the worker compensation (wages and  benefits) that must be paid to produce one unit of goods or services. Unit  labor costs are lower for certain services in developing countries primarily  because workers’ wages in those countries are lower than in the U.S.  However, unit labor costs also depend upon the productivity levels of  workers. Although labor costs in a developing country may be lower than  in the U.S., it may still be possible for the unit cost of labor to be lower in  the U.S. than the other country if U.S. workers’ productivity is much  higher, meaning than the U.S. worker can produce many more or higher  quality products within a certain time frame than a worker in the other  country. Differences in unit labor costs can also result from differences in  costs of employee benefits, such as health care and pension benefits. In  addition, cost savings can be affected by currency exchange rates,  countries’ tax policies, and government-provided incentives such as tax  rebates.
Aside from cost savings, firms may have other incentives to offshore.  Access to a workforce in different time zones across the globe may enable  companies to conduct work around the clock and consequently meet  worldwide customer needs. Establishing a presence in foreign countries  can provide companies access to overseas markets. In addition, offshoring  non-core services can enable companies to focus their resources on their  core functions. By outsourcing non-core functions to overseas firms that  specialize in them, businesses may also experience improvements in the  quality of these functions.
Although firms may have many incentives to offshore, they may also face  disincentives to offshore. Offshoring has several costs associated with it,  including costs to start up an offshore operation and to manage and train  an offshore workforce. In addition, some experts have noted that wages of  workers in developing countries are rising more rapidly than U.S. wages,  therefore shrinking the cost savings of offshoring over time.  Furthermore, offshoring carries potential risks, such as possible political  instability in overseas locations, less reliable civil infrastructure, exchange  rate volatility, less developed legal and regulatory systems, and risks to  intellectual property.
section_title: Legislation Enacted in Response to Trade-Related Concerns
paragraphs: In the last few decades, the Congress has enacted various pieces of  legislation related to trade and increasing global interdependence,  primarily due to concerns about their effects on the manufacturing sector.  (See fig. 2.) This legislation sought to expand U.S. exports; establish fair  trading practices; assist workers, firms, and communities adversely  affected by trade; and improve U.S. competitiveness through support for  education and research and development. For example, trade acts of 1962,  1974, and 1979 sought to expand U.S. exports by establishing mechanisms  for negotiating and entering into trade agreements. The trade acts also  established remedies for industries hurt by import competition through  unfair trade practices. The Trade Act of 1974, as amended, established a  trade adjustment assistance program to provide financial assistance and  retraining to workers involved in the manufacturing of articles who lost  their jobs due to foreign competition. In addition, the act also established  a program that enabled manufacturing firms and communities hurt by  trade to receive technical assistance and financial support to develop new  strategies to improve their competitiveness. Congress enacted various  other legislation to enhance the competitiveness of the U.S. economy by  improving education and supporting research and development. Among  others, these included the Stevenson-Wydler Technology Innovation Act of  1980, which authorized the creation of various technology centers. With  regard to services specifically, the Trade and Tariff Act of 1984 required  the Commerce Department to establish a program on international trade in  services and to issue a report every 2 years. In addition, the Omnibus  Trade and Competitiveness Act of 1988 directs the Secretary of Commerce  to conduct a benchmark survey of services transactions.
Aside from these laws, other legislation enacted by the Congress may  address some concerns raised by trade and globalization. For example,  under the Workforce Investment Act of 1998 (WIA), the Department of  Labor oversees an employment and training system operated by states and  localities to assist displaced workers in obtaining new jobs, which could  include workers who become displaced due to trade-related reasons.
WIA funds may also be used to provide training for employed workers to  upgrade their skills.
section_title: While Traditional Economic Theory Predicts That Offshoring Will Benefit the Overall Economy, Concerns Have Been Raised about Four Areas of Potential Impact
paragraphs: Traditional economic theory predicts that expansion of international  trade, including offshoring, will have beneficial effects on the U.S.  economy, but a number of concerns have also been raised about the  potential economic and social impacts of offshoring. We have identified  four areas of concern about the potential impacts of offshoring: potential  impacts on the average U.S. standard of living, including average wages;  employment and job displacement among American workers; the  distribution of income; and national security and consumer privacy.  Economists and other policy analysts have expressed in literature and in  interviews with us a range of views about the likely impacts of offshoring  on each of these areas. This diversity of views reflects several factors: the  fact that services offshoring is a relatively recent development in  international trade whose impact is not yet fully known; the limitations of  currently available data about the extent of offshoring and its impacts; and  different theoretical expectations about the likely impact of expanded  trade in services on the U.S. economy. The issues identified in this section  may not be exhaustive; others may raise concerns about offshoring that  are not discussed in this report. Figure 3 summarizes experts’ different  views about the four areas of potential impact for the U.S. that we identify.
subsections: section_title: Potential Impacts on the Average U.S. Standard of Living
paragraphs: Traditional economic theory on international trade predicts that  offshoring is likely to be beneficial for the average U.S. standard of living  in the long run; however, some economists have argued that offshoring  could harm U.S. living standards. Economists who contend that offshoring  will increase average U.S. living standards expect that it will do so through  raising productivity (and thereby increasing national income), increasing  average wages for American workers, and providing consumers with  lower prices and access to a broader range of goods and services. In  addition, they expect that U.S. companies will respond to the challenges of  international competition by developing new areas of specialization in the  global economy. Economists who argue that offshoring may lower U.S.  average living standards focus on the possibility that offshoring may  contribute to a decline in the strength of some U.S. industries and may  threaten U.S. leadership in innovation and technological development.  Some economists also focus on the possibility that offshoring may lead to  downward pressure on U.S. wages even if it has positive effects on the  U.S. economy overall. Underlying these disagreements are different  predictions about what areas will emerge as new sources of comparative  advantage in the global economy, as well as different assessments about  whether offshoring is contributing to downward pressure on U.S. wages.
subsections: section_title: Traditional Economic Theory Predicts that Offshoring Will Benefit Average U.S. Living Standards in the Long Run
paragraphs: Effects on Productivity: Offshoring of services represents an expansion  of trade into sectors of the economy that in the past were relatively  untraded; as such, many economists we interviewed or who have  published literature on offshoring expect offshoring to increase  productivity in these sectors. Offshoring is expected to lead to  productivity increases through several mechanisms. First, increased  competition could lead to pressures for greater efficiency, causing least  productive firms to exit the market so that firms that remain in the market  are increasingly focused on managing for greatest productivity. Second,  offshoring—like domestic outsourcing—could enable U.S. firms to  specialize in the core functions in which they add the greatest value, while  moving lower-value job functions out of the country. As U.S. firms  reallocate resources toward higher-value activities, moving lower-value  activities overseas, the U.S. economy overall could see productivity gains.  Third, offshoring could enhance productivity by promoting reductions in  the costs of technology and other inputs that improve the efficiency of  business processes. For example, some economists have argued that  offshoring of IT services will reduce the cost of these services, making   IT-enabled products and services more affordable and leading to increased  diffusion of productivity-enhancing technology throughout many  industries. For instance, the lower cost of offshored health-record  transcription services might encourage more health care providers to keep  digitized medical records, improving the efficiency and productivity of the  health care industry.
Because the acceleration in services offshoring is a relatively recent  phenomenon, empirical evidence about its effects on the productivity of  the U.S. economy remains preliminary. However, the effects of offshoring  in manufacturing have been observed over many years and can shed some  light on the potential impact of services offshoring on U.S. productivity. A  number of research studies suggest that offshore outsourcing contributed  to productivity improvements in U.S. manufacturing. Catherine Mann,  among others, has argued that offshoring in the production of computer  hardware—along with domestic innovation—kept prices of new hardware  low and thereby played a role in the deepening of IT investment  throughout the U.S. during the 1980s and 1990s. Since the mid-1990s, the  U.S. has experienced a period of unusually rapid productivity growth,  which many attribute to accelerating investment in IT and the rapid  diffusion of new applications and uses that occurred in the 1980s and  1990s.
New Areas of Comparative Advantage: Traditional economic theory  also predicts that increased trade—including offshoring—will increase  economic growth, and therefore average living standards in the long run,  by driving the economy to develop new innovative and high-value areas of  comparative advantage—that is, to specialize in the creation of high-value  goods and services that are produced most efficiently in the U.S.  Although increased competition due to offshoring and other trade may  lead to contraction of production and employment within some U.S.  industries, trade is also expected to reallocate the resources of the U.S.  economy to sectors that are comparatively more efficient, such that U.S.  companies are expected to eventually develop new areas of comparative  advantage in the global economy that will lead to continued economic  growth. Some economists contend that advantages that the U.S. has over  less developed countries, such as a relatively high-skilled workforce,  abundance of capital, and well-developed financial markets and  investment opportunities will enable the U.S. economy to specialize in  higher-value work. In particular, they expect that offshoring will  contribute to the reduction or elimination of certain lower-skilled  occupations in the U.S., but lead to the creation of new jobs in  occupations that require higher levels of skill, shifting U.S. production and  the distribution of employment to fields with higher returns.
Some empirical studies suggest that the U.S. economy has historically  developed new high-value areas of comparative advantage as trade has  increased. The process of the U.S. developing higher-value areas of  comparative advantage as lower-value work is moved offshore has been  observed over many years in some manufacturing industries. For example,  in the semiconductor industry, assembly work that was originally  conducted in the U.S. began to be moved offshore in the 1960s. Although  this offshoring did lead to job losses in the U.S., economists Clair Brown  and Greg Linden assert in their research that this movement also kept the  U.S. semiconductor industry competitive and permitted the U.S. industry  to specialize in higher-value work within the industry. According to Brown  and Linden, as chip assembly moved offshore, U.S. firms specialized in  higher-value fabrication work, and when fabrication work began to move  offshore, U.S. firms specialized in design. Offshoring of services has not  been occurring long enough to observe the relationship between  offshoring and the emergence of new areas of specialization; however,  economists J. Bradford Jensen and Lori Kletzer have argued that recent  data demonstrates that workers in industries and occupations that are  more likely to be affected by international trade tend to have higher wages  and higher skills than workers in “non-tradable” service sector jobs, which  is consistent with the hypothesis that offshoring and globalization is  leading the U.S. economy to specialize in higher-value work. Historical  trends also suggest that openness to trade has increased the economy’s  aggregate output in the past. The U.S. economy has grown as trade has  expanded, and internationally, there is some evidence that countries that  are more open to trade typically experience faster growth than those that  are more closed.
Effects on Wages: Some economists also argue that offshoring could  increase average living standards by contributing to growth in average real  wages for U.S. workers, corresponding to offshoring’s effects on  productivity. Economic theory predicts that average real wages should  typically rise with average productivity rates, as workers are compensated  for producing more per hour of work. Wages are expected to move with  productivity growth in the long run if the share of national income that  accrues to workers versus the share that accrues to firms’ profits and  other income remains fairly constant. Historically, wage growth in the   U.S. has broadly tracked productivity growth, although changes in wages  and productivity may have diverged for periods of time (see fig. 4). During  the post-World War II period, the share of national income spent on total  compensation—wages and benefits—rose throughout the 1950s, 1960s,  and 1970s, and has been fairly constant since 1980, averaging about 66  percent of national income, with the remainder accruing to corporate  profits, proprietor’s income, rental income, and net interest. Since 1970,  an increasing amount of total labor compensation has been spent on  benefits rather than wages and salaries. In recent years—since the end of  the 2001 recession—wages have not moved up with productivity growth,  and total labor compensation as a share of national income has declined  somewhat, from 66 percent in 2001 to 64 percent in 2004. During this time,  wages and salaries as a share of national income declined from 55 percent  in 2001 to 52 percent in 2004. Some economists have argued that this  divergence of compensation growth from productivity growth is  problematic and runs counter to assertions that increased productivity  gains from offshoring will necessarily raise average living standards;  however, this fluctuation is considered by other economists to fall within  recent norms.
Effects on Prices and Availability of Consumer Goods and Services:  Traditional economic theory also predicts that offshoring will improve  average U.S. living standards by lowering consumer prices and providing  consumers access to a wider range of goods and services than would  otherwise be available. Many economists expect that competition will lead  companies to pass the cost savings from offshoring onto consumers in the  form of lower prices. However, economic theory also predicts that the  extent to which cost savings are passed onto consumers depends on how  competitive the market is for particular goods and services. While firms in  highly competitive markets are likely to pass most of the cost savings from  offshoring through to the purchasers of the service, in less competitive  markets, economic theory predicts that firms may retain some or all of the  cost savings.
section_title: Some Economists Have Argued That Offshoring Could Negatively Impact U.S. Living Standards
paragraphs: Although the most commonly cited economic trade theories predict that  offshoring will likely have positive effects on the average U.S. living  standard, some trade models generate scenarios under which the U.S.  could lose either its absolute or relative position in the global economy,  and some economists have argued that services offshoring is better  described by these latter types of economic models. Models in which the  U.S. could face potential losses from increased trade such as offshoring  reflect the possibility that as our trading partners become more productive  in creating goods and services that the U.S. specializes in, the economic  position of the U.S. could be undermined. For example, Ralph Gomory and  William Baumol have described scenarios in which a trading partner  experiences productivity improvements in an important U.S. export  industry, resulting in declines in U.S. national income because U.S. firms  lose their position as the most competitive producers in the industry. The  impact on the U.S. workforce, in this model, is particularly detrimental if  the industry in which the U.S. is challenged is highly profitable and pays  high wages, such as industries in which the U.S. has long held  technological superiority or an industry that is difficult to enter. Other  economists have developed different models in which productivity  changes abroad lead to losses in the absolute or relative position of the  U.S. in the global economy. The negative results of increased trade in  these models are not specific to offshoring—they could result from other  forms of trade too, but they are sometimes cited when concerns about  offshoring are raised because services offshoring raises the specter of the  movement of high-value work from the U.S. to foreign trading partners.
Some have raised concerns that offshoring poses risks to U.S. leadership  in innovation, particularly in high-value areas such as technology fields  and research and development, raising the possibility that the global  economic position of the U.S. could be eroded over time. Economists and  other offshoring observers have suggested a range of mechanisms through  which offshoring could have a negative impact on U.S. innovation. Some  argue that innovation results from solving technical problems during  manufacturing, design, and research and development. To the extent that  this work is conducted overseas, offshoring could promote faster  technological diffusion to foreign firms, which may over time lead to  foreign competitors coming to dominate an industry in which the U.S. was  once the technological leader. Some contend that offshoring portions of  the research and development infrastructure could threaten U.S.  technological leadership by disrupting important innovation networks in  the U.S., such as the IT cluster in Silicon Valley in California, or the  biotechnology cluster in Cambridge, Massachusetts, and promoting the  emergence of such networks abroad. In addition, some express concern  that offshoring routine or entry-level work in some technical industries  could hurt the U.S.’s ability to maintain an innovative workforce by closing  off career prospects for some U.S. workers and discouraging U.S. students  from entering those fields.
Another concern raised by some economists is that offshoring could  reduce average living standards for American workers by slowing the  growth of average wages. These economists raise the concern that even if  offshoring promotes economic growth and productivity, it could decrease  labor’s share of national income by subjecting American workers to direct  competition with foreign workers, leading to slower growth or even a  decline in average wages. As we previously noted, recent statistics show  a dip in the share of national income accruing to total worker  compensation in recent years, and some economists believe that  offshoring may be contributing to this trend.
Finally, some question whether firms will use the cost savings from  offshoring in ways that lead immediately to the productivity improvements  and consumer price reductions predicted by trade theory. Under certain  market conditions, an individual firm could retain supernormal profits  (profits above the usual for their particular industry and product) for a  period of time, distributing these gains to shareholders or their remaining  employees, rather than passing on cost savings to consumers in the form  of price reductions or investing their cost savings in productivity- enhancing reorganization or new technology. Although economic theory  predicts that under many market conditions competitive forces will  constrain the ability of firms to earn supernormal profits on an ongoing  basis, the assumption that individual firms face perfectly competitive  market conditions may not necessarily be accurate. Thus, some offshoring  experts stress the importance of examining firm-level decisions to  determine whether, how, and how quickly offshoring leads to price  reductions and the reorganization of firms and industries toward  specialization in higher-productivity activity.
Underlying the debate about the effects of offshoring on the average U.S.  standard of living are different perspectives on the following questions:    What new areas of comparative advantage will the U.S. economy develop  to compensate for declines, if any, in areas threatened by offshoring?
How will offshoring affect average U.S. wages? Will the possible benefits  of productivity gains offset the possible downward pressure exerted by  increased exposure of U.S. workers to global competition?
section_title: Potential Impacts on Employment and Job Displacement
paragraphs: Many economists agree that offshoring is not likely to affect aggregate U.S.  employment in the long run, but acknowledge that in the short run,  workers will lose their jobs when employers relocate production abroad.  At the same time, some economists have commented that offshoring may  cause structural changes in the labor market because increased trade  alters the mix of goods and services produced in the U.S. These structural  changes could generate permanent changes in the types of work  conducted by the U.S. labor force and could also possibly have longer- term effects on the U.S. unemployment rate. There is disagreement about  the expected direction of any structural changes in the labor market due  to offshoring, the expected magnitude of job displacement due to  offshoring, and the implications of this displacement for those workers  who are directly affected by it. Underlying these disagreements are  different estimates about the projected extent of job losses due to  offshoring, which types of jobs will be offshored, which areas of the  economy will generate growth in job opportunites, and the re-employment  experiences of workers whose jobs are offshored.
subsections: section_title: Many Economists Expect Offshoring to Have Little Effect on Long-Run Aggregate Employment, but Expect It to Have Effects on the Structure of Employment
paragraphs: Economic theory predicts that expansions in trade, including offshoring,  typically should not affect the overall employment level (net employment)  in the U.S. in the long run. Some economists argue that the U.S. labor  market is generally expected to adjust quickly to changes in economic  conditions because new jobs will be created as jobs are lost, and as a  result, those who lose their jobs due to economic changes such as  offshoring are expected to readily find new work. Given a flexible labor  market, these economists theorize that the primary determinant of  fluctuations in the employment rate is aggregate demand in the overall  economy, observed in the business cycle.
Historically, the U.S. economy has rarely experienced unemployment rates  higher than 10 percent of the labor force, with the exception of unique  periods such as the Great Depression. According to Bureau of Labor  Statistics (BLS) data, since 1947, the civilian employment rate has  increased gradually from around 59 percent in the 1940s and 1950s, to an  average of 66 percent over the past 20 years. During this period, the  unemployment rate has generally fluctuated between about 4 percent to   8 percent, averaging 5.6 percent per year, even though the U.S. labor force  has grown by, on average, 1.4 million people per year. Furthermore, the  U.S. employment rate has not been correlated with trade or imports. While  traded goods and services have increased from about 4 percent of the  gross domestic product (GDP) to about 14 percent of GDP over the past   60 years, employment rates have steadily increased. Even shocks to the  percentage of the economy that is open to trade, such as the passage of  major trade agreements, have not been correlated with significant changes  in employment rates. Some have argued that while balanced trade may not  affect employment levels, large and continued trade deficits put American  jobs at risk. Historically, however, although employment in certain sectors  of the economy is sensitive to trade balances, there has been no evidence  of a correlation between trade deficits and overall employment.
Although there is dispute over the number of jobs likely to be lost due to  offshoring in years to come, even the larger estimates generally represent  a small enough fraction of the total number of jobs destroyed and created  in the U.S. that many believe the U.S. labor market is likely to be able to  absorb the change. For example, some private sector studies estimate that  between 100,000 to 500,000 information technology jobs will be displaced  over the next few years, and potentially several million jobs across all  occupations could shift outside the U.S. over the next decade. Several  economists have pointed out that even the larger job loss estimates  represent a relatively small percentage of the total number of jobs  destroyed and created annually in the U.S. According to BLS statistics,  since the end of the last recession in the fourth quarter of 2001, the U.S.  has shed an average of 7.64 million jobs per quarter, while creating an  average of 7.77 million jobs per quarter. Viewed in this context, some note  that estimates of the number of jobs that could be lost due to offshoring do  not appear to be as large of a shock to the economy. Moreover, some  maintain that job losses due to offshoring should also be viewed in the  context of the two-way flow of trade. Jobs are created as a result of U.S.  firms exporting goods and services to other countries and foreign firms  locating their production in the U.S. through direct foreign investment.
Although some economists argue that trade, including offshoring, is  unlikely to affect long-term employment rates, others have noted that  increases in offshoring and globalization could lead to changes in the  structure of employment, which could lead to changes in the number of  jobs available in different occupations and industries and could also  potentially increase unemployment. Structural changes to employment  involve the permanent reallocation of workers and resources throughout  the economy. Offshoring could contribute to structural changes in  employment by changing employers’ demand for different skill-sets and  occupations within certain industries. For example, offshoring could lead  to substantial reductions in low-skilled IT-based services work while  generating increases in high-skilled work such as IT systems management.  It may take a long time for the economy to replace jobs lost to structural  changes with new jobs because workers must switch industries, locations,  or skills in order to find re-employment and because employers must  create new jobs. Although the workforce should eventually adjust to the  structural changes in the economy, a significant structural change could  potentially lead to an increase in unemployment in the meantime.
Regardless of the impact of offshoring on aggregate employment and the  unemployment rate, many economists acknowledge that offshoring and  increased trade could produce structural changes that could generate  permanent shifts within the U.S. labor market. Some economists believe  these structural changes will lead to the U.S. workforce gaining better jobs  overall, as U.S. businesses respond to offshoring and globalization by  creating jobs in new areas of specialization that capitalize on the relatively  highly skilled workforce and abundance of capital of the U.S. economy.  For example, some note that while the U.S. has lost significant numbers of  computer programming jobs, potentially due to offshoring, the U.S.  economy at the same time has experienced an increase in the number of  more sophisticated computer-related occupations, such as computer  software engineers. Other economists suggest that structural changes  could lead to lower-quality jobs if the U.S. develops comparative  advantage in areas that primarily produce low-skilled jobs.
Research has been done on the extent to which job gains and losses in  recent years have resulted from structural changes in the economy;  however, this research does not indicate whether the structural changes  were due to offshoring. For example, in their study of the recent U.S. labor  market, Erica Groshen and Simon Potter found evidence of structural  change following the end of the 2001 recession, although they did not  investigate whether offshoring was a cause of the structural change.
section_title: There is Widespread Recognition That Offshoring Will Cause Some Job Displacement but Considerable Disagreement about the Expected Magnitude of This Problem
paragraphs: Although many economists believe that aggregate employment will not be  significantly affected by offshoring, there is widespread recognition that  offshoring may nevertheless displace at least some workers from their  jobs, leading to adjustment costs incurred by these workers and their  families as they seek re-employment. In other words, although net job loss  due to offshoring may be minimal, with losses in some industries and  occupations offset by employment growth in other areas, gross job losses  due to offshoring could be significant.
Limited data make it difficult to draw conclusions about the current extent  of job loss due to offshoring. The data limitations have led to conflicting  claims, with some arguing that offshoring is a minor phenomenon and  others arguing that it is being underestimated. For example, some cite data  from the Mass Layoff Statistics (MLS) program produced by the Bureau of  Labor Statistics, which showed that about 16,000 manufacturing and  services job separations—less than 3 percent of the nonseasonal mass  layoffs that took place in 2004—resulted from “movement of work” to  locations outside the U.S. However, the MLS undercounts total job  separations due to offshoring because it is designed to capture only mass  layoffs, not total layoffs. In contrast, others cite privately collected data  that suggests that the extent of offshoring is much greater. For example,  some have cited data collected by Kate Bronfenbrenner and Stephanie  Luce, who attempted to measure the extent of offshoring with data  collection from media reports and other sources. Extrapolating from a  three month period, they estimate that as many as 406,000 manufacturing  and services jobs were shifted from the U.S. to other countries in 2004.
Although there is considerable uncertainty about the number of jobs that  have been lost due to offshoring, a number of economists expect that  offshoring is likely to expand in the future, both in absolute numbers and  in types of work. For example, Cynthia Kroll has estimated that nearly   15 million people, or 12 percent of the employed labor force, are in white- collar occupations at risk to offshoring, though she notes that not all jobs  in these occupations are likely to be offshored. Private sector studies  have also attempted to create forecasts of the effects of offshoring on  employment in “at-risk” occupations; some of these studies project that  between 100,000 and 500,000 IT jobs will be displaced within the next few  years, and potentially several million jobs across all occupations will shift  outside the U.S. over the next decade. However, these studies face  challenges in estimating the effects of offshoring because they are often  based on federal statistics that currently provide limited information on  the level and effects of offshoring.
Some economists have expressed concerns about the potential size of the  dislocation costs for workers who lose their jobs due to offshoring, based  in part on the experiences of manufacturing workers whose jobs were lost  due to trade; others argue that the costs of displacement might not be as  large for services workers as they have been for manufacturing workers.  Dislocation costs that workers could potentially experience include lost  income during their period of unemployment and a lifetime of reduced  wages if they cannot find a job that pays as much as the job they lost.  Dislocation costs could be higher if job losses are concentrated in  geographic areas because it may be difficult for the regional economy to  absorb so many job seekers quickly and the local real estate market could  be impacted. Research on workers dislocated from jobs in manufacturing  industries that faced import competition suggests that workers who lose  their jobs due to trade-related employment changes tend to be less likely  to find reemployment and to face larger income declines after job  displacement than workers displaced from industries that are less trade- sensitive. However, some have raised questions about whether these  results are applicable to trade-impacted services workers, who tend to  have more desirable labor market characteristics than manufacturing  workers. Research by J. Bradford Jensen and Lori Kletzer suggests that in  recent years, services workers displaced from “tradable jobs”—jobs in  industries and occupations likely to be affected by trade—had labor  market advantages over those displaced from “non-tradable” service  sector jobs and from manufacturing jobs, such as more education and  higher predisplacement earnings. Re-employment rates were slightly  higher for displaced service sector workers in tradable jobs, compared to  those in non-tradable jobs, and were significantly higher than the  reemployment rates for displaced manufacturing workers. Earnings losses  were significant for displaced services workers in tradable jobs, however.  Of those re-employed, 55 percent experienced a decrease in earnings, with  the average re-employed worker experiencing a 30 percent decline in  earnings after reemployment. These large losses reflect the fact that  displaced services workers in tradable jobs tended to have had relatively  high wages prior to displacement.
Underlying the debate about the effects of offshoring on employment and  job displacement are different perspectives on the following questions:    Will offshoring contribute to structural changes in U.S. employment, and  how will these changes affect aggregate employment levels and the type of  occupations available to U.S. workers?
How many workers will be displaced due to offshoring?
What are the reemployment experiences of workers dislocated due to  offshoring?
section_title: Potential Impacts on the Distribution of Income
paragraphs: Some economists have expressed concern that offshoring could accelerate  income inequality in the U.S.; however, others argue that changes in the  income distribution are driven primarily by factors unrelated to offshoring,  and still others point out that offshoring could potentially decrease income  inequality. Those who think offshoring might accelerate income inequality  believe it could do so by lowering the wages of some lower-wage and  middle-class jobs, while potentially increasing the wages of smaller  numbers of highly compensated positions. Those who disagree argue that  offshoring is unlikely to have significant effects on wages and the U.S.  income distribution because changes in demand for different skills are  driven more by technological developments than by the changing  international division of labor. Those who argue that offshoring could  reduce income inequality note that this could occur if offshoring generates  wage pressure on high-wage jobs, such as engineering, without  significantly affecting the wages of low-wage jobs. Offshoring could also  reduce income inequality if it reduces the cost of services that are  consumed by primarily lower- and middle-income Americans. Underlying  these disagreements are debates about whether, in the long run, offshoring  will change the demand for U.S. workers with different skill levels, which  sectors of the income distribution are most likely to be affected by this  changing demand, and whether offshoring leads to reductions in the cost  of services that primarily benefit lower- and middle-income Americans.
subsections: section_title: Some Economists Expect That Offshoring Could Affect the Distribution of Wage Income among U.S. Workers
paragraphs: Because offshoring is expected to have effects on the structure of  employment within the national economy, it is expected to affect the  distribution of income in the U.S.; however, experts hold differing views  about the direction of these effects. Some contend that offshoring will  increase income inequality and note several possible ways that it could do  so. First, offshoring could increase income inequality if it primarily led to  job losses or wage reductions among relatively low-income workers but  had less of an effect on the jobs or wages of middle- and higher-income  workers. Some offshoring observers argue that offshoring in the service  sector has thus far primarily affected lower-wage jobs, such as call-center  work and office support functions, rather than middle- or higher-income  jobs. Second, some economists and policy analysts have expressed  concern that offshoring could reduce wages at the middle of the income  distribution and lead to a “hollowing out” of the middle class if it is  primarily middle-income jobs that are moved offshore or experience wage  declines. For example, some economists and other policy analysts have  noted that sophisticated and well-paid job functions, such as computer  programming and radiology analysis, are increasingly susceptible to  offshoring. In addition, some contend that offshoring will lead to increased  inequality by contributing to income growth among those at the high-end  of the income distribution. For example, an increase in corporate profits  resulting from offshoring may promote growth in high-wage managerial  positions and income accruing to business owners.
However, some economists contend that offshoring could also reduce  income inequality if it leads to job losses or reduced wages among higher- wage occupations, such as engineering, without significantly affecting the  jobs and wages of low-wage workers. In addition, some argue that  offshoring could reduce inequality if it led to a decline in the wages, and  consequently fees charged, by highly compensated workers who provide  services to lower- and middle-income households. For example, if  offshoring puts downward pressure on the wages of accountants, the  resulting decrease in the cost of accounting services represents an  increase in real wages for lower- and middle-income households who use  these services, reducing inequality.
Trade theory can provide a rationale for those who have noted that  offshoring could lead to increasing income inequality. One of the most  commonly cited models, the Heckscher-Ohlin model, predicts that when  the U.S. initiates or expands trade with a country that has a dissimilar  workforce, such as a developing country, this trade is likely to have a  negative effect on the distribution of wage income within the U.S.  workforce. For example, when trade expands between the U.S., a country  with a large pool of highly-skilled and educated workers, and a developing  country with a large pool of less skilled and educated workers, this model  generally predicts that the U.S. will specialize in those goods and services  that are best produced by more skilled and educated workers, while the  developing country will specialize in those goods and services best  produced by less skilled and less educated workers. The implication of  this international specialization for U.S. workers is that demand for skilled  workers in the U.S. will grow, while demand for less skilled workers in the  U.S. will shrink. As a result, wages for more skilled and educated U.S.  workers will increase relative to the wages of less skilled and educated  U.S. workers, thus increasing income inequality. However, to the extent  that services offshoring involves the movement of higher-skilled work to  developing countries, more complex versions of this model generate  different predictions about income inequality in the U.S.—income  inequality could decline if the demand for higher-skilled workers declines  relative to the demand for lower-skilled workers.
Although many economists agree that international trade, including  offshoring, could have some impact on the distribution of income, some  argue that these factors are not among the more important determinants  of the U.S. income distribution. These economists argue that other factors  are much more significant determinants of the changing U.S. income  distribution. In particular, technological change is viewed by some  economists as the primary determinant of the growing wage gap between  more and less skilled workers. Many economists claim that as  technological advances have occurred, particularly in computers and IT,  requirements for technological skills for workers across a range of  occupations have increased, requirements that often translate into  increased demand for more educated workers. At the same time,  technological advances have permitted some routine work to be  automated, decreasing demand for less-skilled workers. Numerous studies  have examined whether trade or technological change explained a larger  share of the growing wage gap between more and less educated workers  during the 1980s and 1990s, with the majority concluding that  technological change was a more important determinant than trade. On  balance, these studies conclude that trade has made a small contribution  to the increase in income inequality. Estimates suggest that trade explains  between 10 and 20 percent of the increase in income inequality, with the  majority of the increase attributable to other factors such as technological  change that favors higher-skilled workers. However, the impact of services  offshoring on income inequality has not been examined to the same extent  that manufacturing trade has.
Underlying the debate about the effects of offshoring on U.S. income  distribution are different perspectives on the following questions:    What are the characteristics (occupation, skill level, and wages) of jobs  that are moving offshore?
What are the characteristics of jobs that are being created?
Will offshoring reduce the cost of goods and services that are important  consumption items for middle and lower income households?
section_title: Potential Impacts on Security
paragraphs: Experts express varying degrees of concern that offshoring could pose  security risks, including increased risks to national security, critical  infrastructure, and personal privacy. Underlying these disagreements are  unresolved questions about the extent to which offshore operations pose  additional risks than outsourcing services domestically and the extent to  which U.S. laws and standards apply and are enforceable for work  conducted offshore.
subsections: section_title: Some Concerns Have Been Raised That Offshoring May Pose Increased Risks to National Security and Critical Infrastructure, Though Some Experts Contend That Offshoring May Not Pose Additional Major Risks
paragraphs: Some security and offshoring experts, including the Department of  Defense (DOD), have raised concerns that offshoring could pose increased  risks to national security and critical infrastructure, but others believe that  offshoring will not. National security concerns relate to government  programs and systems involved in national defense, particularly military  and intelligence operations. Critical infrastructure concerns relate to  systems and structures owned by either government or private entities  that are essential to the country, such as utilities, transportation, and  communications networks.
One concern raised by security experts is that offshoring the development  of software used in defense systems could pose additional security risks,  specifically, that foreign workers with hostile intentions could obtain  critical information or introduce malicious code into software products  that could interfere with defense or infrastructure systems. There are  currently few explicit restrictions on the type of services work that can be  sent offshore. DOD’s Defense Security Service has analyzed this issue  and identified concerns with the potential exploitation of software  developed in foreign research facilities and software companies for  projects related to classified or sensitive programs. We have reviewed  DOD’s management of software developed overseas for defense weapons  systems as well. Our report noted that multiple requirements and  guidance acknowledge the inherent risks associated with foreign access to  classified or export-controlled information and technology and are  intended to protect U.S. national security by managing such access.  However, we found that DOD does not require program managers of major  weapons systems to identify or manage the potential security risks from  foreign suppliers. For instance, DOD guidance for program managers to  review computer code from foreign sources not directly controlled by  DOD or its contractors is not mandatory. In addition, DOD programs  cannot always fully identify all foreign-developed software in their  systems.
Private-sector groups and government officials have raised similar  concerns about the added security risks posed by offshoring to U.S. non- military critical infrastructure, such as nuclear power plants, the electric  power grid, transportation, or communications networks. For example,  some have noted that sensitive but unclassified information, such as the  plans of important U.S. utilities or transport networks, could be sent to  foreign locations where it could be released improperly or made available  to hostile foreign nationals. Other concerns relate to the offshoring of  software development and maintenance. Software security experts in the  public sector—including DOD and the Central Intelligence Agency—have  expressed concern that organizations and individuals with hostile  intentions, such as terrorist organizations and foreign government  economic and information warfare units, could gain direct access to  software code by infiltrating or otherwise influencing contractor and  subcontractor staff, and then use this code to perpetrate attacks on U.S.  infrastructure systems or conduct industrial or other forms of espionage.  Security experts also note that critical infrastructure systems rely  extensively on commercial off the shelf (COTS) software programs that  are developed in locations around the world. These programs include  exploitable vulnerabilities and potentially even malicious code that can  allow indirect access to infrastructure systems to cause the systems to  perform in unintended ways. Thus, some experts believe that ongoing use  of COTS software modules, whether developed offshore or not, as well as  offshoring of software-related services could increase the risk of  unauthorized access to critical infrastructure code in comparison to in- house development and maintenance of proprietary programs and code.
Security experts also express concerns about longer-term effects of  offshoring. For instance, some note that continued offshoring of certain  products might make the U.S. dependent on foreign operations for critical  civilian or military products, and therefore vulnerable if relations between  the U.S. and those countries become hostile. Another concern is the ability  to control access to certain civilian technologies with military uses when  work on these technologies takes place in foreign locations. Some fear  that offshoring certain high-tech work may lead to the transfer of  information and technology that could be used by foreign entities to match  or counter current U.S. technical and military superiority. The U.S. can  control exports of such dual-use technologies by requiring firms to obtain  an export license from the Department of Commerce before they can be  worked on in foreign locations or by foreign nationals. We have reviewed  some aspects of this export licensing program and found key challenges to  Commerce’s primary mechanism for ensuring compliance with export  licenses.
Some representatives of business groups contend that offshoring may not  pose major increased security concerns for a variety of reasons. Some  believe that protections currently in place are adequate to manage the  added risks posed by offshoring. Currently, the Department of Defense has  mandatory procedures to safeguard classified information that is released  to U.S. government contractors, and firms that offshore certain work  related to military technologies are required to obtain export licenses from  either the State or Commerce departments. In addition, some argue that  foreign workers in offshore locations do not necessarily pose added  security risks, relative to U.S. workers in domestic outsourced operations,  because domestic workers could also improperly handle information.  Some foreign affairs experts also argue that offshoring could have positive  effects on national security. They contend that increased international  trade may reduce the threat of international tensions because countries  with integrated economies have a stake in one another’s well-being.
section_title: Concerns Have Been Raised about the Impact of Offshoring on Personal Privacy
paragraphs: Experts express varying degrees of concern about the impact offshoring  may have on personal privacy when medical and financial records become  accessible in overseas locations. Privacy advocates, academics, and  offshoring researchers have noted concerns with the possibility that  personal information sent to foreign locations could be improperly  released, leading to identity theft, diversion of funds, and breaches of  confidentiality. However, others note that the Gramm-Leach-Bliley Act,  which covers the privacy of financial information, limits disclosure of  personal information and requires financial institutions to protect the  security and confidentiality of their customers’ personal information  through written agreements when information is sent to a third-party  service provider. The privacy of medical information is covered under the  Health Insurance Portability and Accountability Act Privacy Rule, which  requires certain entities that hold medical records to receive satisfactory  written assurance that any of their business associates will handle  information appropriately. We are currently conducting work that  examines offshoring of protected health information and related privacy  issues.
Underlying the debate about the effects of offshoring on security are  difference perspectives on the following questions:    To what extent does offshoring pose added security risks?
Do existing laws, regulations, and controls provide adequate protection  from the added risks posed by offshoring that do exist?
section_title: A Wide Range of Policies Have Been Proposed to Address Concerns about Offshoring’s Potential Impacts
paragraphs: Offshoring observers have proposed a broad range of policies in response  to offshoring, representing a variety of different ideas about how public  policies could address the concerns raised by offshoring. We have  categorized these proposals into four types on the basis of concerns they  seek to address: (1) improving U.S. global competitiveness, (2) addressing  effects on the U.S. workforce, (3) addressing security concerns, and   (4) reducing the extent of offshoring. Some analysts have proposed  policies in more than one of these areas. On the other hand, it is also  possible to take the position that services offshoring does not warrant any  changes in government policies. While we indicate the rationales that have  been presented for the various policy proposals, we do not evaluate the  merits and drawbacks of these proposals. Relevant factors to consider in  evaluating proposals would include the magnitude of the problems that  policy proposals seek to address, likely effectiveness of the proposals,  potential negative consequences, financial costs to government, and  feasibility of administration.
subsections: section_title: Proposals to Improve the Competitiveness of the US Economy
paragraphs: Proponents of policies that seek to improve U.S. global competitiveness  view offshoring as one aspect of much broader economic and trade issues  and maintain that the debate should be focused on issues broader than the  offshoring of work by companies headquartered in the U.S. They contend  that the appropriate focus should be on the broader public policy issue of  how the U.S. can continue to compete and attract high-paying jobs in a  time of rapidly increasing trade and open global markets that allow  multinational firms to hire labor from around the world. These proponents  have articulated proposals that seek to help the U.S. economy develop  new areas of specialization in response to increased foreign competition  by fostering the types of industries and businesses that can succeed in a  global economy and promote the creation of high-value jobs. In addition,  some regard these proposals as important for promoting U.S. economic  growth, regardless of the offshoring debate. Many of these proposals have  been articulated as broad policy objectives, such as “fostering innovation”  or “improving education” rather than as specific policy mechanisms to  achieve these objectives. Suggestions for how to improve U.S. global  competitiveness include proposals to promote innovation and creative  industries, improve human capital and the skill level of the U.S. workforce,  reduce the costs of doing business in the U.S., and establish trade  practices that promote U.S. exports.
subsections: section_title: Promoting Innovation
paragraphs: Many economists and policy analysts have predicted that for the U.S.  economy to successfully adjust to offshoring, it will need to develop and  produce new, innovative goods and services that require and reward  higher levels of skill, and they believe that government actions can help to  bring about this development. In addition, they point out that private  companies can lack the incentives and time horizons to invest sufficiently  in basic research—research undertaken without specific desired  applications but that can lead to innovations. Some have also noted that  federal funding for basic research has recently declined as a percentage of  GDP and that foreign governments are increasing their research spending  to improve their own economies’ innovative capacity. Policies that have  been proposed to promote innovation include:  Increasing government support for basic research and development  projects.
Making permanent the current research and development tax credit to  encourage companies to increase their own spending. Currently, the tax  system allows businesses to obtain a tax credit for certain spending on  research and development, but this credit requires regular reauthorization,  rather than being a permanent feature of the tax code.
Increasing government spending on particular forms of infrastructure and  technology that can support innovation, such as broadband Internet  connections.
section_title: Improving Workforce Skills
paragraphs: Many who emphasize the broad goal of improving U.S. competitiveness  also support upgrading the nation’s workforce skills and human capital by  improving education, increasing opportunities for worker training, and  reforming immigration policy. They contend that for the economy to move  into higher-end, innovative products to replace job functions that have  been offshored, more American workers will need to develop the  knowledge and skills to perform complex, nonroutine work. In particular,  they emphasize the importance of education programs in the science,  technology, engineering, and mathematics fields. In addition, some have  noted that workers will increasingly need to upgrade their skills  continually throughout their careers in order to adjust to rapid changes in  the modern economy. As a result, many policies proposed in response to  offshoring seek to increase the skill level of current and future generations  of U.S. workers, including the following proposals:  Improving K-12 education, with special attention on increasing  achievement in math and science fields. Proponents of these policies  argue that U.S. students demonstrate poor achievement in these subjects  relative to students in other nations, bringing into question whether the  U.S. will have an adequate supply of scientists and engineers to sustain a  globally competitive and innovative economy.
Expanding and improving lifelong learning through increased federal  support of worker training and advanced adult education programs. One  specific proposal is instituting “human capital tax credits” that could be  offered either to businesses that spend money on worker training  programs or to individuals who spend money on their own education.  Such tax credits could partially offset the costs to business of training  workers who may not stay with a company for long and the costs to  workers of learning skills that may not guarantee long-term employment.
Encouraging immigration of high-skilled workers. Proponents of these  policies note that a large and growing segment of U.S. scientists and  engineers are foreign-born. Specific proposals to increase the number of  highly educated immigrants in the U.S. include raising the number of  temporary work visas that allow high-skilled workers to enter the country  and expediting the issuance of green cards for foreign graduates of U.S.  universities.
section_title: Reducing Business Costs
paragraphs: Other proposals to improve competitiveness focus on ways to reduce the  costs of doing business in the U.S. relative to other countries. Proponents  of these policies note that cost reduction is a leading motive for businesses  to offshore service-sector work and that higher costs can affect the ability  of U.S. firms to compete against foreign firms in the global economy.  Proposals to reduce business costs in the U.S. include:    Reducing federal taxes and regulatory requirements on businesses.
Proponents of these policies argue that complex and high taxes and  extensive regulations raise costs for companies to do business in the   U.S. These proposals assume that taxes in foreign countries would remain  unchanged, so that a decline in U.S. taxes would reduce the cost of doing  business in the U.S. relative to the cost of doing business overseas, thus  increasing incentives for companies to keep work in the U.S.
Reducing costs to businesses of providing health care to employees.
Proponents of these policies argue that high health care costs drive up the  total cost of labor compensation for employers, although it is possible that  increases in U.S. health care costs could be partially or fully offset by  decreases in other components of labor compensation. Various  approaches have been proposed to decrease health care costs, such as use  of improved technology in the management of patient care, establishing  association health plans that would allow small businesses greater  leverage in negotiations with health insurance providers, and establishing  a universal healthcare system.
section_title: Enhancing U.S. Exports
paragraphs: Another type of policy response to offshoring and increasing global  interdependence focuses on expanding the market for U.S. exports.  Proponents of these policies contend that several factors may be  depressing U.S. exports and that more can be done to “level the playing  field” of international trade. One concern is that while the U.S. has opened  up its markets to foreign competition, some foreign governments have not  opened certain of their markets, especially for services in which U.S.  companies are globally competitive, such as financial services. Where  trade agreements are in place, some have raised concerns that certain  foreign governments may be violating them, such as by providing subsidies  to their own industries or imposing nontariff barriers to their markets. A  further concern that has been expressed is that some foreign governments  may be artificially lowering the value of their currencies relative to the  dollar so that their exports are relatively inexpensive, while U.S. exports  become relatively more expensive. Policies that have been proposed to  redress these concerns and enhance U.S. exports include the following:    Continuing to negotiate trade agreements that will open foreign markets in  which U.S. companies have export opportunities.
Taking more aggressive actions to challenge foreign government actions  that may violate existing trade agreements, such as bringing actions at the  World Trade Organization (WTO) and imposing retaliatory measures  allowed under WTO rules. Such violations could include foreign countries’  tax incentives to U.S. companies that offshore or inadequate protection of  intellectual property rights of U.S. imports, which harms the sales of U.S.  products forced to compete with unlicensed versions.
Continuing to persuade countries that may have undervalued currencies to  raise their currency values or to otherwise engineer a controlled decline in  the value of the dollar.
section_title: Proposals to Assist Workers Affected by Offshoring
paragraphs: Proposals to address concerns about offshoring’s effects on workers seek  to reduce the costs borne by some individuals when an economy becomes  increasingly open to foreign trade and competition. Many of these  proposals would provide assistance to workers during their period of  unemployment and to help them obtain new jobs. While some of these  proposals put particularly strong emphasis on retraining displaced  workers, not all observers agree that retraining policies would be  effective. Other proposals would expand broad social insurance programs  that would cover all workers and provide benefits to anyone who loses a  job.
subsections: section_title: Assisting Displaced Workers in Transition to New Employment
paragraphs: Many proposals to help workers affected by offshoring focus on programs  designed to help workers adjust to job losses and to facilitate their  reemployment. These include the following proposals:    Amending the Worker Adjustment and Retraining Notification (WARN)
Act to increase the notice that employers must give employees from 60 to  90 days when offshoring will cause a mass layoff or plant closure.
Extending the Trade Adjustment Assistance (TAA) program to services  workers. The TAA program provides extended unemployment benefits and  subsidized training to workers involved in the production of articles who  can demonstrate that they were displaced due to increased imports or  shifts in production to foreign countries. It generally serves workers who  have been laid off from the manufacturing sector.
Expanding or developing income support and reemployment programs  that would assist displaced workers in general, not just those who meet  TAA criteria. Several policy advocates and researchers who have studied  offshoring have stated that existing government programs to serve  displaced workers do not provide adequate protections or assistance for a  changing economy in which global trade affects more workers. For  instance, they have questioned the effectiveness of existing worker  retraining programs or expressed doubts that retraining will be an  effective response as international pressures begin to affect higher-skilled  occupations and workers who already have advanced educations.
Establishing wage insurance, a program that would pay displaced workers  who find reemployment at a lower wage a percentage of the difference  between their previous and new earnings for a limited time. Proponents of  wage insurance contend that it would provide incentives for dislocated  workers to reenter the labor market quickly, even if they must do so at  lower wages. In addition, proponents maintain that wage insurance could  encourage workers to take jobs in unfamiliar fields where their  inexperience commands lower wages, but where the job imparts new in- demand skills, and allow them to build new careers.
section_title: Broader Reforms of Social Insurance Programs
paragraphs: Some have proposed broader reforms to strengthen the social safety net  and mitigate some of the hardships generated by the economic insecurity  associated with an increasingly integrated global economy. Proponents of  these policies emphasize the need to accompany open trade policies with  enhanced social protections for all workers who are increasingly exposed  to risks by international competition, such as job loss, job insecurity, or  downward wage pressure. In addition, proponents contend that  government policies should compensate workers who bear the costs of  trade-induced economic disruptions. Such proposals would potentially  affect large segments of the population and would require extensive  rethinking and redesign of U.S. social policy, but proponents maintain that  they could increase public acceptance of open trade policies. Such  proposals include the following:    Making health and pension benefits portable and/or universal so that  workers who lose their jobs can retain their access to medical care and  retirement plans. Some favor the government’s providing universal health  care coverage, and others propose preserving or expanding portable or  universal retirement coverage.
Requiring employers that move jobs offshore to pay some of the costs for  worker assistance programs. Proponents contend that government should  play a role in redistributing some of the gains from offshoring to workers  who have been negatively affected. Proponents believe that such  proposals would serve this principle and could mitigate some concerns  about offshoring’s effects on income inequality.
section_title: Proposals to Protect Security
paragraphs: Proposals to address concerns about security seek to reduce the added  risk that information sent to foreign locations could be used in ways that  could impair U.S. national security, critical infrastructure, or personal  privacy. Proposals include restrictions on certain types of work with  security implications and strengthening standards governing how  information is handled.
subsections: section_title: Protecting National Security and Critical Infrastructure
paragraphs: Concerns that offshoring could pose increased risks to national security or  critical infrastructure have led to proposals to restrict some services work  from being sent to foreign locations or performed by foreign nationals and  to improve security standards for work that is performed offshore,  including the following proposals:    Requiring that certain projects involving defense acquisitions or military  equipment be performed exclusively in the U.S.
Requiring that work on critical infrastructure projects such as electricity  grids or pipelines be done within the U.S.
Increasing the standards and review procedures that apply to use of  offshore services. For example, GAO has previously recommended that  DOD adopt more effective practices for developing software and  increasing oversight of software-intensive systems, such as ensuring that  risk assessments of weapons programs consider threats to software  development from foreign suppliers.
section_title: Protecting Personal Privacy
paragraphs: Concerns that offshoring could pose added risks to the privacy of personal  information have led to a variety of proposals to enhance protections,  including the following:    Requiring companies to keep work involving sensitive private information  in the U.S.
Requiring companies to notify and obtain consent from U.S. residents  before sending personal information to be processed in other countries.
Ensuring that consumers have legal recourse against U.S. firms for privacy  breaches by foreign contractors.
Strengthening U.S. laws and regulations concerning the handling of  personal information, regardless of whether the data are handled  domestically or overseas. Those who propose this option contend that U.S.  laws and regulations do not provide adequate protections for personal  information in general, regardless of where the information is handled.
section_title: Proposals to Reduce the Extent of Offshoring
paragraphs: Another type of policy that has been proposed to address the various  concerns raised by offshoring focuses on reducing the extent of  offshoring. Some of these policy proposals focus on offshoring by  government agencies, while others seek to modify firms’ incentives with  respect to where they source their work.
subsections: section_title: Restricting Offshoring by Government Agencies
paragraphs: There have been numerous proposals to limit or constrain offshoring by  federal and state governments, including the following examples:  Legislation proposed to prohibit federal work or federally funded work  from being performed in foreign countries, unless the foreign goods or  services are for use in that country.
Legislation proposed to require contractors with the U.S. military and  executive agencies to have at least 50 percent of their workforce in the  U.S.
Legislation proposed to prohibit the federal government from providing  assistance to, or doing business with, companies that in the last 5 years  offshored jobs previously performed in the U.S., unless the company also  creates significant replacement jobs in the U.S.
Legislation proposed in several states to restrict the procurement of state- funded services from overseas.
Proposals to prohibit government contracts from going to countries that  have not signed trade agreements with the U.S. on non-discrimination in  government procurement.
section_title: Modifying the U.S. Tax Code to Reduce Incentives for Offshoring
paragraphs: Another proposed means of reducing offshoring is to change tax policy to  alter the relative costs of domestic versus foreign production. Many  economists and policy analysts believe the current tax system provides  incentives for U.S. multinational firms to locate work at their overseas  affiliates because it allows them to defer taxes on profits earned on some  activities in foreign countries until the profits are brought back to the U.S.  However, some note that this tax treatment helps U.S.-owned businesses  compete in foreign markets against foreign-owned businesses. Proposals  for changing the tax code include:    Eliminating the ability of firms to defer foreign-earned income by taxing  foreign profits at the same rate as domestic profits in the year they are  earned. This proposal would affect only offshoring that takes place  between U.S.-based multinational firms and their foreign affiliates. It  would not affect offshoring that involves outsourcing work to separate  firms located overseas.
Establishing a value-added tax (VAT) system, in which a tax could be  applied to products imported to the U.S. and rebated on products the   U.S. exports. However, as GAO and others have reported, many  economists believe that such border tax adjustments would not affect the  trade balance in the long run because exchange rates would adjust to  offset the border adjustments.
section_title: Providing Incentives for Businesses to Locate Work in the U.S.
paragraphs: Other policy proposals would enhance incentives for firms to locate work  domestically. Proponents of these policies note that foreign governments  award incentives, such as providing buildings, infrastructure, and tax  exemptions, to companies that export service products. In response, some  suggest that the U.S. provide similar incentives, including the following  proposals:    Providing tax reductions or subsidies to companies that employ domestic  workers. One specific proposal is a tax credit for companies in certain  industries identified as affected by offshoring that would cover the payroll  taxes of newly hired employees.
Providing federal assistance for regional economic development plans,  including infrastructure improvements and grants targeted at attracting  work that might otherwise be offshored.
section_title: Additional Research in Key Areas May Help Advance the Offshoring Debate
paragraphs: Determining appropriate policy responses to the offshoring phenomenon  is challenging for several reasons. Services offshoring is a relatively recent  phenomenon that raises a broad range of issues. No federal data series  directly measure the extent of offshoring or its effects. Moreover, experts  have expressed differing views about the potential impacts of offshoring.  Nevertheless, there are some key areas where further research might help  to provide more information about the impacts and policy implications of  services offshoring. These areas include  impacts of offshoring on various sectors of the U.S. economy, and  especially the sectors that are emerging as new sources of comparative  advantage; impacts of offshoring on the workforce, such as numbers of workers  displaced and their reemployment experiences; impacts of offshoring on the U.S. income distribution, including trends in  wage levels of jobs moving offshore; and    any increased security-related risks posed by offshoring and the extent to  which these are mitigated by current practices and laws.
Further research in these areas could help inform policy making by  providing more information about the nature and magnitude of the  benefits and costs resulting from offshoring. For example, research on  whether offshoring is negatively impacting important sectors of the  economy could help to inform the need for new policies to enhance U.S.  competitiveness. Further information on the number of job losses  resulting from offshoring as well as how workers fare in the labor market  after their dislocations could help inform the need for new policies to  assist displaced workers and to target these policies appropriately.  Research on how offshoring is affecting the distribution of income in the  U.S. could help to inform policy makers whether new policies are needed  to address income inequality. Research that examines whether offshoring  increases risks to national security, critical infrastructure, and consumer  privacy can help to inform policy makers whether there is a need for  additional security protections. Finally, research in all of these areas may  help to advance the debate about whether policies to reduce the extent of  offshoring are warranted.
Researchers are conducting studies that can shed light on some of these  areas. For example, some researchers have conducted case studies that  examine the effects of offshoring in the semiconductor, call center, and  radiology industries. Among other issues, these studies examined the  types of work that are conducted offshore and the types of work that are  conducted in the U.S. In their study of the radiology industry, for instance,  Frank Levy and Ari Goelman conclude that radiology work conducted  overseas is unlikely to displace radiology work done in the U.S., noting  that offshore work primarily consists of preliminary readings of  radiological images conducted at night when few radiologists in the   U.S. would be available. However, the radiology industry may not be  comparable with other industries in which offshoring takes place. Other  researchers have utilized statistical methods for analyzing existing data  series. For example, Martin Baily and Robert Lawrence have used a variety  of methods to analyze trade and employment data and examine  offshoring’s effects on unemployment. In some instances, researchers  may be able to apply statistical methods that were utilized in research on  offshoring and trade in the manufacturing sector to conduct research on  services offshoring.
There may also be opportunities to expand or improve current federal data  series to obtain more information on this topic. For example, some have  raised concerns that there is a significant discrepancy between data on the  levels of services imports from India as reported by U.S. federal  government sources and the data reported by India. In a review of BEA  and Indian services data, we identified several factors that contributed to  this discrepancy, such as differences in each country’s definitions of trade  in services. We also recommended ways in which BEA can further  improve its services trade data. Other examples of limitations of current  databases identified by offshoring researchers are that data on services  trade are not available at a sufficiently detailed industry level, trade data  may not capture services that are bundled with goods or other services,  and data on foreign affiliates of multinational corporations lack  information on occupations of workers employed overseas.
Table 1 illustrates some key areas where further research might contribute  to a better understanding of the effects and policy implications of  offshoring. The table identifies some pertinent data sources, though none  of the sources can directly answer the research questions. Generally  speaking, these data sources can provide information on a phenomenon,  such as changes in employment in a given occupation or changes in the  output produced by an industry, but they cannot provide information on  the extent to which these changes resulted from offshoring. For example,  BLS collects data on employment levels in various industries and  occupations, but the data capture job losses and gains that occur for all  reasons, not only because of offshoring. Table 1 also identifies some of the  methodological approaches that have been, or could be, used in these  areas of research. These include conducting in-depth studies of firms and  industries and using statistical methods for analyzing existing data. Table 1  also highlights some potential challenges and limitations of the various  approaches. For example, while in-depth studies of services offshoring in  particular industries may shed light on some dynamics of the offshoring  phenomenon, their findings are not necessarily reflective of what is  occurring nationally. Our overview of research questions, data sources,  research methods, and limitations is not meant to be exhaustive.  Researchers will continue to pose new questions and approaches to gain  further insights into offshoring.
section_title: Concluding Observations
paragraphs: Services offshoring is likely to remain an important public policy issue for  years to come. The extent of offshoring could increase in the future as  technology advances, U.S. firms become more adept at offshoring, and  other countries continue to improve their abilities to provide services for  the global economy. Because the services offshoring phenomenon is  relatively new, little is known about its effects on the U.S. economy and  society. Due to limited data and empirical research thus far, the debate  about offshoring has largely been theoretical in nature. Policy makers and  analysts face data challenges as they seek to assess the wide range of  policies that have been proposed in response to offshoring. In making  these assessments, they may consider various relevant factors, such as the  magnitude of the problems that policy proposals seek to address, likely  effectiveness of the proposals, potential negative consequences, financial  costs to government, and feasibility of administration.
As the offshoring phenomenon continues, researchers in both the public  and private sectors are likely to conduct more studies and collect more  data that will provide a clearer understanding of offshoring and its effects.  We have highlighted some key areas where further research might help  advance the debate about the impacts and policy implications of  offshoring. While such research faces numerous challenges and  limitations, it offers some prospect for additional insights on diverse  aspects of services offshoring.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Departments of Commerce,  Labor, Treasury, and the Office of the United States Trade Representative.  We received written comments from Commerce, which are reprinted in  appendix III. Commerce stated that it appreciated the thoroughness of our  review and that the report will be a useful reference starting point for  discussions of the causes and impacts of offshoring. Commerce also stated  that offshoring may raise living standards for the average American and  affect fewer workers than the headlines seem to indicate, but that all of us  must be troubled when any American workers lose their jobs, for  whatever reason. Commerce added that the most powerful remedy for this  problem is a growing economy that can ensure every American who wants  a job is able to find one. Commerce, Treasury, and the Office of the U.S.  Trade Representative provided technical comments, and we modified the  report as appropriate to address these comments. The Department of  Labor did not have comments.
Copies of this report are being sent to the Departments of Commerce,  Labor, and Treasury; the Office of the U.S. Trade Representative;  appropriate congressional committees; and other interested parties.  Copies will be made available to others upon request. The report is also  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about matters discussed in this  report, please contact me at (202) 512-7215 or at nilsens@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Other contacts and staff  acknowledgments are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: Our objectives in this study were to: (1) describe experts’ views about the  potential effects of services offshoring on the U.S. economy, workforce,  national security, and consumer privacy; (2) describe the types of policies  that have been proposed in response to offshoring; and (3) discuss areas  where further research could advance the debate on offshoring. Our  methodology consisted of an extensive literature review and interviews of  selected experts. In addition, we attended several conferences on services  offshoring during the course of our work. We conducted our work from  May 2004 to November 2005 in accordance with generally accepted  government auditing standards.
We reviewed literature on services offshoring produced by academic  experts, think tanks, business groups, labor groups, and government  agencies such as the Congressional Research Service. Our literature  review built upon work conducted under previous GAO studies of services  offshoring. We collected additional literature by reviewing research  databases such as Econlit and Proquest and through general Internet  searches. We also conducted targeted searches of the literature produced  by various think tanks, interest groups, and other government agencies. In  addition, we were referred to literature through citations in other  literature, through media accounts, and by experts we interviewed.  Through the course of our work, we sought to obtain a diverse body of  literature that described various views on the potential effects of services  offshoring and policy proposals. For studies summarizing empirical  research findings, GAO reviewed these studies solely to describe the views  of various experts on the effects of offshoring and the research  methodologies they used. The inclusion of studies in this report does not  imply that we deem them definitive or that the evidence presented in them  is conclusive. Additionally some of these studies contain estimates of job  losses due to offshoring of services that are of undetermined reliability.  These estimates are presented for illustrative purposes and should not be  considered in the same manner as the official government data on  employment and trade discussed in the report. See the bibliography for a  list of key literature reviewed for this report.
We interviewed experts from government agencies, academia, think tanks,  and organizations representing business and labor interests. We met with  government officials at the departments of Commerce, Labor, and  Treasury, and at the Office of the U.S. Trade Representative because each  of these agencies analyzes issues related to offshoring. We selected other  experts to interview based upon literature they published related to the  offshoring phenomenon and through referrals by other experts. We strove  to obtain a balance of views among the experts we interviewed. In  addition to interviewing experts, we also reviewed interviews conducted  for other GAO work on services offshoring. See appendix II for a list of  experts interviewed for this report.
We also attended several conferences related to services offshoring to  obtain further viewpoints on this topic, including conferences organized  by the Brookings Institution, William Davidson Institute at the University  of Michigan Business School, CATO Institute, Labor and Worklife Program  at Harvard Law School and the North American Alliance for Fair  Employment, Stanford Business School’s Sloan Masters Program and  World Affairs Council of Northern California, Asia-Pacific Research Center  at Stanford University, and the Bernard and Audre Rapoport Center for  Human Rights and Justice of the University of Texas School of Law.
section_title: Appendix II: List of Experts Interviewed
paragraphs: Jodie Allen  Senior Editor  Pew Research Center  Robert Atkinson  Vice President & Director  Technology & New Economy Project  Progressive Policy Institute  Ashok Bardhan  Senior Research Associate  Fisher Center for Real Estate & Urban Economics, Haas School of   Business, University of California Berkeley  William Baumol   Professor of Economics  New York University  Jagdish Bhagwati  Professor of Economics  Columbia University  Josh Bivens  Trade Economist  Economic Policy Institute  Susan Collins  Senior Fellow, Economic Studies  The Brookings Institution  Ralph Gomory   President  Alfred P. Sloan Foundation  Ron Hira  Assistant Professor of Public Policy  Rochester Institute of Technology and  Vice President for Career Activities, Institute of Electrical and Electronics  Engineers-USA  Josh James  Manager of Research  American Electronics Association  Matthew Kazmierczak  Director of Research  American Electronics Association  Martin Kenney   Professor of Human and Community Development  University of California Davis  Lori Kletzer   Professor of Economics  University of California, Santa Cruz  Cynthia Kroll   Senior Regional Economist  Fisher Center for Real Estate & Urban Economics, Haas School of  Business, University of California Berkeley  Jeff Lande  Senior Vice President  Information Technology Association of America  Robert Lawrence  Professor of International Trade and Investment  Center for Business & Government, John F. Kennedy School of  Government, Harvard University  Thea Lee  Assistant Director for International Economics  AFL-CIO  Robert Litan  Senior Fellow  Economic Studies  The Brookings Institution  Catherine Mann   Senior Fellow  Institute for International Economics  Lee Price  Research Director  Economic Policy Institute  Robert Reich  Professor of Social and Economic Policy  Brandeis University  Dani Rodrik   Professor of International Political Economy  John F. Kennedy School of Government, Harvard University  Enrique Sanchez  Director  Bank of America (retired)
section_title: Appendix III: Comments from the Department of Commerce
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Andrew Sherrill, Assistant  Director; Yunsian Tai and Katrina Ryan, Analysts in Charge;   Rhiannon Patterson; Eric Wenner; Margaret Armen; Lawrance Evans, Jr.;  and Tovah Rom made significant contributions to this report.
section_title: GAO Related Products
paragraphs: Defense Acquisitions: Knowledge of Software Suppliers Needed to  Manage Risks. GAO-04-678. Washington, D.C.: May 25, 2004.
Defense Trade: Better Information Needed to Support Decisions  Affecting Proposed Weapons Transfers. GAO-03-694. Washington, D.C.:  July 11, 2003.
Export Controls: Post-Shipment Verification Provides Limited  Assurance That Dual-Use Items Are Being Properly Used. GAO-04-357.  Washington, D.C.: January 12, 2004.
Export Controls: Processes for Determining Proper Control of Defense- Related Items Need Improvement. GAO-02-996. Washington, D.C.:  September 20, 2002.
Federal Procurement: International Agreements Result in Waivers of  Some U.S. Domestic Source Restrictions. GAO-05-188. Washington, D.C.:  January 26, 2005.
Higher Education: Federal Science, Technology, Engineering, and  Mathematics Programs and Related Trends. GAO-06-114. Washington,  D.C.: October 12, 2005.
Highlights of a GAO Forum: Workforce Challenges and Opportunities for  the 21st Century: Changing Labor Force Dynamics and the Role of  Government Policies. GAO-04-845SP. Washington, D.C.: June 2004.
Industrial Security: DOD Cannot Ensure Its Oversight of Contractors  under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July  15, 2005.
International Trade: Current Government Data Provide Limited Insight  into Offshoring of Services. GAO-04-932. Washington, D.C.: September 22,  2004.
International Trade: Further Improvements Needed to Handle Growing  Workload for Monitoring and Enforcing Trade Agreements. GAO-05-537.  Washington D.C. June 30, 2005.
International Trade: Treasury Assessments Have Not Found Currency  Manipulation, but Concerns about Exchange Rates Continue. GAO-05- 351. Washington, D.C.: April 19, 2005.
International Trade: U.S. and India Data on Offshoring Show  Significant Differences. GAO-06-116. Washington, D.C.: October 27, 2005.
Tax Policy and Administration: Review of Studies of the Effectiveness of  the Research Tax Credit. GAO/GGD-96-43. Washington, D.C.: May 21,  1996.
Trade Adjustment Assistance: Reforms Have Accelerated Training  Enrollment, but Implementation Challenges Remain. GAO-04-1012.  Washington, D.C.: September 22, 2004.
The Worker Adjustment and Retraining Notification Act: Revising the  Act and Educational Materials Could Clarify Employer Responsibilities  and Employee Rights. GAO-03-1003. Washington, D.C.: September 19,  2003.
section_title: Bibliography
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Aron, Ravi and Ying Liu. “A Study of Operational Risk in Off-Shore  Outsourcing of Information Work: Evidence from Field Research.”  Working Paper OPIM-2005-05-06. Philadelphia, Pa.: The Wharton School,  University of Pennsylvania.
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