Offshoring

Production offshoring, also known as physical restructuring, of established products involves relocation of physical manufacturing processes overseas,[7] usually to a lower-cost destination or one with fewer regulatory restrictions.

Physical restructuring arrived when the North American Free Trade Agreement (NAFTA) made it easier for manufacturers to shift production facilities from the US to Mexico.

This trend later shifted to China, which offered cheap prices through very low wage rates, few workers' rights laws, a fixed currency pegged to the US dollar, (currently fixed to a basket of economies) cheap loans, cheap land, and factories for new companies, few environmental regulations, and huge economies of scale based on cities with populations over a million workers dedicated to producing a single kind of product. However, many companies are reluctant to move high value-added production of leading-edge products to China because of lax enforcement of intellectual property laws.[8]

Growth of offshoring of IT-enabled services, both to subsidiaries and to outside companies (offshore outsourcing) is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecommunication and Internet expansion of the late 1990s.[9]

Much of the job movement, however, was to outside companies - offshore outsourcing.

Reshoring, also known as onshoring, backshoring [10] or inshoring,[11] is the act of reintroducing domestic manufacturing to a country. It is the reverse process of offshoring.[12]

John Urry, professor of sociology at Lancaster University, argues that the concealment of income, the avoidance of taxation and eluding legislation relating to work, finance, pleasure, waste, energy and security may be becoming a serious concern for democratic governments and ordinary citizens who may be adversely affected by unregulated, offshore activities. Further, the rising costs of transportation could lead to production nearer the point of consumption becoming more economically viable, particularly as new technologies such as additive manufacturing mature.[13]

The World Bank's 2019 World Development Report on the future of work[14] considers the potential for automation to drive companies to reshore production, reducing the role of labor in the process, and offers suggestions as to how governments can respond. A similar movement can be seen related to Robotic Process Automation, called RPA or RPAAI for self-guided RPA 2.0 based on artificial intelligence, where the incentive to move repetitive shared services work to lower cost countries is partially taken away by the progression of technology.

Melanie Rojas et al in a 2022 Deloitte's report commend adopting a combination of re-shoring and friendshoring - "working with other nations and trusted supply sources" - as a business practice and policy initiative aiming to promote supply chain resilience.[15]

President Obama's 2011 SelectUSA program was the first federal program to promote and facilitate U.S. investment in partnership with the states. This program and website helps companies connect with resources available on a Federal, State and local level. In January 2012, President Obama issued a call to action to "invest in America" at the White House "Insourcing American Jobs" Forum.[17]

Advances in 3D printing technologies brought manufacturers closer to their customers.[18]

There have been several very successful stories of companies. In most cases hundreds if not thousands of jobs were created or reinstated. In the case of Starbucks, in 2012 it saved American Mug and Stein Company in East Liverpool, Ohio from bankruptcy.[19]

Some cases of reshoring have not been successful. Otis Elevators' reshoring effort did not go well.[20] Otis says it failed to consider the consequences of the new location and tried to do too much at once, including a supply-chain software implementation. This is not an uncommon reshoring scenario. Bringing manufacturing back to the United States isn't so simple, and there are a lot of considerations and analyses that companies must do to determine the costs and feasibility of reshoring. Some companies pursue reshoring with their own internal staff. But reshoring projects are complicated and involve engineering, marketing, production, finance, and procurement. In addition, there are real estate concerns, government incentives and training requirements that require outreach to the community. To help with these projects, companies often turn to consultants that specialize in reshoring.[21]

There is a relationship between offshoring and patent-system strength. Companies under a strong patent system are not afraid to move work offshore because their work will remain their property. Conversely, companies in countries with weak patent systems have an increased fear of intellectual property theft from foreign vendors or workers, and, therefore, have less offshoring.

Offshoring is often enabled by the transfer of valuable information to the offshore site. Such information and training enables the remote workers to produce results of comparable value previously produced by internal employees. When such transfer includes protected materials, as confidential documents and trade secrets, protected by non-disclosure agreements, then intellectual property has been transferred or exported. The documentation and valuation of such exports is quite difficult, but should be considered since it comprises items that may be regulated or taxable.

In 2015, IT employment in the United States has recently reached pre-2001 levels[26][27] and has been rising since.

The number of jobs lost to offshoring is less than 1 percent of the total US labor market.[28] According to a study by the Heritage foundation, outsourcing represents a very small proportion of jobs lost in the US. The total number of jobs lost to offshoring, both manufacturing and technical represent only 4 percent of the total jobs lost in the US. Major reasons for cutting jobs are from contract completion and downsizing.[29] Some economists and commentators claim that the offshoring phenomenon is way overblown.[29]

The Economist reported in January 2013 that "High levels of unemployment in Western countries after the 2007-2008 financial crisis have made the public in many countries so hostile towards offshoring that many companies are now reluctant to engage in it."[30] Economist Paul Krugman wrote in 2007 that while free trade among high-wage countries is viewed as win-win, free trade with low-wage countries is win-lose for many employees who find their jobs offshored or with stagnating wages.[24]

Two estimates of the impact of offshoring on U.S. jobs were between 150,000 and 300,000 per year from 2004 to 2015. This represents 10-15% of U.S. job creation.[31]

The increased safety net costs of the unemployed may be absorbed by the government (taxpayers) in the high-cost country or by the company doing the offshoring. Europe experienced less offshoring than the U.S. due to policies that applied more costs to corporations and cultural barriers.[6]

In the area of service research has found that offshoring has mixed effects on wages and employment.[32][33][34][35][36][37]

The World Bank's 2019 World Development Report on the future of work [14] highlights how offshoring can shape the demand for skills in receiving countries and explores how increasing automation can lead to reshoring of production in some cases.

U.S. opinion polls indicate that between 76-95% of Americans surveyed agreed that "outsourcing of production and manufacturing work to foreign countries is a reason the U.S. economy is struggling and more people aren't being hired."[38][39]

Regardless of size, companies benefit from accessibility to labor resources across the world.[44] This gave rise to business models such as Remote In-Sourcing that allow companies to tap into resources found abroad, without losing control over security of product quality.

New categories of work such as call centres, computer programming, reading medical data such as X-rays and magnetic resonance imaging, medical transcription, income tax preparation, and title searching are being offshored.

Before the 1990s, Ireland was one of the poorest countries in the EU. Because of Ireland's relatively low corporate tax rates, US companies began offshoring of software, electronic, and pharmaceutical intellectual property to Ireland for export. This helped create a high-tech "boom" which led to Ireland becoming one of the richest EU countries.[43]

In 1994 the North American Free Trade Agreement (NAFTA) went into effect, and it increased the velocity of physical restructuring.

The plan to create free trade areas (such as Free Trade Area of the Americas) has not yet been successful. In 2005, offshoring of skilled work, also referred to as knowledge work, dramatically increased from the US, which fed the growing worries about threats of job loss.[43]

The general criteria for a job to be offshore-able are:

• There is a significant wage difference between the original and offshore countries;
• Remote work is possible in the job;
• The work can be transmitted over the Internet;
• The work is repeatable.[45]

The opposing sides regarding offshoring, outsourcing, and offshore outsourcing are those seeking government intervention and Protectionism versus the side advocating Free Trade.[46]

Jobs formerly held by U.S. workers have been lost, even as underdeveloped countries such as Brazil and Turkey flourish.[47] Free-trade advocates suggest economies as a whole will obtain a net benefit from labor offshoring,[48] but it is unclear if the displaced receive a net benefit.[49]

Some wages overseas are rising. A study by the U.S. Bureau of Labor Statistics found that Chinese wages were almost tripled in the seven years following 2002. Research suggests that these wage increases could redirect some offshoring elsewhere.[50]

Increased training and education has been advocated to offset trade-related displacements, but it is no longer a comparative advantage of high-wage nations because education costs are lower in low-wage countries.[51]