Offshoring and the anti-globalisation movement

A Donald Trump presidency would mark a major turning point for the anti-globalisation movement if he follows through on his pre-election statements on trade. A key attraction for disaffected Democrats, the Bernie Sanders contingent, are Trump’s statements on ‘bringing jobs back to the United States’. His declared intent is to introduce a 35% tax on companies who offshore the manufacture of products and then import those goods back to the U.S. 35% is certainly a big number and would no doubt get the attention of all those well-known industrial and consumer brand names who currently outsource and offshore a lot of their activity to India, China and Mexico. A policy like this could therefore mark a major turning point for one of the dominant management trends of the past twenty five years.

Before delving further into the subject and assessing some potential implications it is probably worthwhile to pause on a few basic definitions. Outsourcing and offshoring are often used interchangeably but there is a difference, albeit in some cases you see instances of outsourcing and offshoring occurring at the same time. Outsourcing simply describes a situation where an organisation buys goods or services from a third party with the third party being located either in the same country as the buyer or potentially overseas. Offshoring usually describes a situation where the location of the manufacture or service has been moved overseas. The ownership of the offshored facility may not necessarily change; it simply becomes a more remote manufacturing or service unit. Companies often outsource an activity to an overseas operator so it is not uncommon to find outsourcing and offshoring taking place concurrently.

It may be time for the offshoring industry to wake up and smell the coffee. Despite an army of ‘expert’ economists, the media and senior business managers and politicians forming an alliance to defend EU membership the British people voted for a Brexit. Represented by much of the UK media as an anti-immigration rebellion the story is also very much one of dissatisfaction with the effects of a generation of globalisation initiatives. The EU and the offshoring of jobs are appear to conflate in this argument in that millions of jobs have been allowed to migrate ‘offshore’ to Eastern Europe and Asia while at the same time hundreds of thousands of EU citizens have been encouraged to find work in some of the most deprived areas of the United Kingdom. The people in these areas quite naturally rebelled. They have seen little or nothing of the benefits of globalisation and yet have been faced with all of its negative impacts. Donald Trump’s support in the United States and the rapid rise of anti-EU political movements across Europe are arguably just more localised manifestations of this general rejection of a pattern of corporate behaviour that has channelled the rewards of globalisation to a small minority. It remains an irony that the EU’s broadly protectionist stance has not in fact been effective in protecting the constituencies most in need: fortress Europe has failed.

The politics of this new anti-globalisation paradigm suggests that regulation could lurch in the direction of state based protectionism along the lines of Trump’s proposed punitive taxation regime. ‘Fair trade’ will likely mean something different in this new world. It could well evolve to describe situations where the central banking tools of international trade, currency manipulation events, are blunted by international agreements that are created with tariffs and taxes that adapt to relative values in currencies. Perhaps they will also seek to control the migration of labour and impose a better balance in the movement of jobs between states. However these international trade agreements evolve it is likely that the focus will be more on recognising the imbalances that have occurred in the past and making sure they are not repeated. The people have spoken and will not react well if they are ignored. For ‘fairness’ read protectionism.

Away from the politics of anti-globalisation the offshoring industry will need to re-think its business model. Sustainable business solutions will need to be closer to home and corporate social responsibility will be much more about looking after jobs and people in domestic markets than introducing a few green recycling bins and promoting an energy reduction campaign. Whether the offshoring industry could actually die is moot although it clear that the political pressures to reduce its impact on the domestic social and economic infrastructure will translate into a far smaller industry. It may even accelerate a newer trend of ‘Inshoring’, the practice of moving an overseas activity back into a domestic market.

The regulatory and taxation aspects of this new world could still be some years away which presents something of a challenge for those companies currently looking at the relative advantages of moving production and service tasks overseas. At the moment it is still very much a cost and service calculation: can the same activity take place overseas at a cost lower than the domestic market but at the same price? If the answer is ‘yes’ then the business case is made and the operating model can change. In the future the tariff and taxation regime could well be substantially greater and the impact on corporate reputations will be more of a consideration. Even today companies regarded as significant exporters of domestic jobs are at constant risk of having their brands impacted by these behaviours. They are not seen as good corporate citizens. Corporate social responsibility will become much more important in the coming decades.

In a 2008 report the Nottingham Centre for Research on Globalisation and Economic Policy delivered a broadly benign piece of research on the impacts of offshoring on the UK economy. Its findings indicated that offshoring was responsible for an estimated 3.5% of job losses in the UK in 2005 but nonetheless suggested that job gains outweigh job losses without clearly specifying the mechanism (possibly inward investment). It further suggested that companies who offshore generally experience an increase in average productivity gains and also associated offshoring with an increase in company turnover. The report acknowledged that average service sector wages decline with more offshoring but postulated that average manufacturing wages stay broadly the same.

A more current 2015 report from the CEPR (Centre for Economic Policy Research) probed further into the impact of offshoring on British jobs. It took a far closer look at the geographical and industry sector impacts and is a far better reference point for explaining how and why some regions and industries have been particularly badly hit while others have seen enormous benefits. By delving into the detail we can start to understand why deprived areas of the country are rebelling and perhaps glean insights into the reasons for anti-EU and anti-globalisation sentiment.

The report divided the UK employment market into ‘routine’ and ‘non-routine’ jobs. It basically suggested that the UK jobs market has become increasingly polarised into these two categories ‘with labour market disadvantages increasingly concentrated in specific occupational categories.’ Routine occupations have rapidly declined in recent years while non-routine jobs have shown a slight increase. A finding of the study indicated that routine jobs were ‘overrepresented in some parts of the UK, mainly in the midlands, the north and the northwest, Wales, and parts of Scotland. By contrast, non-routine activities were overwhelming concentrated in London and the southeast, with spikes in cities such as Aberdeen, Edinburgh, Harrogate, Manchester, and Bristol.’

The report found that ‘the impact of offshoring in places more exposed to such trends as a consequence of their pre-existing industry specialisation was significantly negative on routine occupations.’ It further noted that ‘the consequences of offshoring are likely to be particularly severe in the short and medium term in specific areas with a high initial specialisation in routine activities.’ In other words the areas where routine jobs are ‘overrepresented’ have and will continue to experience the predominantly negative effects of globalisation in the short term and will have to wait much longer for the positive effects of offshoring to work their way through the system: ‘In addition, compensation effects of job creation in non-routine occupations were strengthened in the long term, once efficiency gains linked to the geographical rationalisation of production had been capitalised.’

So we have the outline of an explanation for the changes that are taking place in the political world and perhaps can now rationalise what we can all see with some economic data. Parts of the UK are very unhappy with their lack of prosperity and are likely to continue to express this dissatisfaction in the ballot box until the economic benefits of globalisation start to spread across the UK.

At the micro level we have to be cognitive of this dynamic and as change managers need to factor-in the potential changes to regulation and taxation in our evaluation of offshoring propositions. The UK is far less likely to introduce anything near a 35% levy on imported goods and services than the US but there will no doubt be some taxation implications for states seen to be unfairly trading with the UK or pursuing predatory pricing. Offshoring should perhaps no longer be seen as the automatic answer to many cost reduction challenges, and even if it is still seen as a viable option the location of an offshoring proposal will require even deeper consideration. Strategic views of national politics and trade practices are likely to become an increasingly integral part of the offshoring decision. An offshoring decision barely features on the corporate social responsibility agenda at the moment but we cannot be certain that this will sustain. The electorate is now watching and the political class have become much more aware of the relationship between corporate decisions and any potential impacts on voter intentions. Stripping a pension fund of hundreds of millions of pounds may be attracting the opprobrium of the public today but a few years from now it is not beyond the realms of possibility that an announcement to offshore hundreds of jobs from an economically deprived area will attract the similar amount of voter (and therefore customer) revulsion.

With or without a Donald Trump presidency we need to be far more careful about those offshoring decisions in the coming years.

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