In a 2/10/04 letter to the Health and Government Operations Committee of the Maryland House of Delegates, the Information Technology Association of America (ITAA) opposed legislation (H.B. 183) to prohibit the state of Maryland from approving procurement contracts that ship U.S. jobs overseas. The ITAA arguments in support of the continued off-shoring of American jobs include half-truths, distortions and misstatements of fact. Each of the major ITAA arguments is examined below in detail.
TRADE IN SERVICES
ITAA Claim #1: “The American IT industry is the strongest in the world – already running a multi-billion dollar trade surplus. A trade surplus means, in its simplest terms, that we create many more jobs in the U.S. by exporting our IT products and services than are created abroad by our imports of those products and services. We are not like the automobile or textile industries, in which we run massive trade deficits.”
U.S. trade in services may not now look like the deficits we have in auto and textiles, but it is fast heading in that direction.
- According to the U.S. Department of Commerce, our overall trade surplus in services has sunk from $85 billion in 1999 to just $60 billion in 2003 – a loss of nearly 30% in less than five years. If the surplus continues to fall at this speed, it will disappear completely within the next ten years.
Trade Surplus in Services
Billions of US$
- Intra-firm trade in computer and information services is just one area in which our overall surplus has completely disappeared. In fact, since 1998 that surplus of $400 million has turned into a deficit of $1.4 billion in 2002.
- Our 1998 surplus in accounting, auditing and bookkeeping services had also turned into a deficit by 2002. Meanwhile, our surpluses in architectural engineering, industrial engineering, management and consulting, and research and development plummeted during the same period by 36%, 47%, 50%, and 80%, respectively.
- For 2003, the overall trade surplus in services declined again from $64.8 billion in 2002 to $60 billion in 2003—an 8% loss.
The trade surplus in services is quickly being whittled away by corporations in hot pursuit of cheap foreign labor markets, most of whom have few if any other meaningful protections for workers’ rights. If taxpayer subsidized off-shoring continues at its current rate, it may only be a matter of time until our services industry–like the manufacturing industry before it–falls victim to short-sighted trade policies that put corporate profits over working families.
ITAA Claim #2: “… a ban on sending work offshore to obtain IT solutions will cost the taxpayers of Maryland a great deal more, while providing citizens with no additional value for their tax dollars. As an example, it cost the State of New Jersey an additional $900,000 over the life of one call center services contract – an increase of over $70,000 per job – to bring 12 call center jobs back to Camden, New Jersey. That money is now not available for the recipients of the program benefits because it is being spent on back office operations.”
While it may cost more for companies to employ workers in good jobs in the U.S. than it does for them to ship jobs overseas, this is not a valid argument for subsidizing corporate outsourcing with taxpayer money.
- First, there is simply no guarantee that contractors will actually pass on the savings from off-shoring to the state. The New Jersey case cited by the ITAA is a perfect example. When the call center contractor – eFunds – moved its call center from Green Bay, Wisconsin to India after the contract was in force, it continued to charge the state of New Jersey the exact same price for its services. All of the savings from shipping the call center job overseas went straight into the contractor’s pockets as profit.
- When the state demanded that eFunds perform the work in New Jersey instead, eFunds used the opportunity to economically blackmail the state by demanding that the state pay an extra 36.9 cents per call in order for the work to be performed at a Camden call center. This extra cost didn’t just to cover wages, but also rent, utilities, and equipment for the new Camden facility.
- As it turns out, this surcharge is costing the state of New Jersey about $775,000 a year, not the $900,000 originally estimated. The costs may have been even less if the state had re-bid the contract rather than giving in to eFunds’ demands.
Second, tax money invested in job creation creates its own additional benefits for the community and the state–benefits that don’t show up in the payroll records of state contractors. But they have real positive impacts on the local economy.
- New local jobs provide employment for those who might otherwise need public assistance to secure housing, food, child care, and health care for their families.
- Additional local jobs mean more money being contributed to the state and local tax base, and more spending dollars being reinvested in the local economy.
- In addition, in the New Jersey case, the additional contract costs paid not just for the creation of new jobs, but financed new lease payments, utilities fees, equipment purchases and other investments that benefit the local economy in Camden.
None of these benefits are available when tax dollars are used to subsidize the export of American jobs. When jobs are off-shored, those who become unemployed become tax users not tax contributors.
COMPETITION FOR STATE CONTRACTS
ITAA Claim #3: “The proposed legislation will unduly complicate the procurement process and deprive the state of the opportunity to obtain the best value for its technology dollars. States, just as with any customer in the government or commercial market, should consider a number of factors when making a buying decision. Those decisions, especially when purchasing information technology products or services, are complex and must look beyond single factors such as labor rates …. “
“ If enacted, HB 183 will make the Maryland procurement process more burdensome and expensive …. Some agencies will find that some of their contractors lack onshore capabilities in a particular component of their business, requiring either contract severance or the creation of a waiver system to allow a vendor to continue its work with the state.”
“The restrictions contained in HB 183 will make the state less attractive to contractors who otherwise might wish to compete for IT procurement contracts. Competition for state business may diminish, making it more challenging for the state’s buyers to obtain the best technology on the market and to obtain the best value for the taxpayer …. By dictating where companies must base such services, the state begins to look less attractive as a location for IT and services operations.”
These assertions are nothing more than a rehash of the “business climate” arguments that legislators hear each and every time they try to legislate in the public interest. Whenever lawmakers consider adding requirements to the procurement process or pursue other regulatory proposals, industry lobbyists make dire predictions of business flight to friendlier territory.
- The truth is that state legislatures for more than 50 years have been putting into place a wide variety of conditions on public contracts—minority participation requirements, prevailing wage laws, prison industry preferences, “Buy America” or “Buy Local” provisions as well as other stipulations for the procurement of goods and services, without imposing unbearable burdens on the public contracting process.
- Companies have not abandoned states with such laws, nor do they make re-location decisions based solely on whether such laws exist. One more state requirement on the procurement of services can be just as easily administered and enforced as all of the others, with no adverse consequences for the state.
TRADE WAR; CONSTITUTIONALITY
ITAA Claim #4: “Any trade barriers created by the United States – or the fifty states – in an attempt to avoid global competition for U.S. workers will lead to retaliation from our trading partners and even an all-out trade war – resulting in a drag on the global economy and reduced employment here at home. Trade must work in both directions; protectionist measures must be avoided in the United States as well as abroad.”
“… there is some doubt to whether the proposed legislation would be constitutional, or compliant with federal law on international trade. In the past, similar state-level statutes have been challenged on the ground that they unconstitutionally infringe on the federal government’s power to regulate commerce.
“In the international legal sphere, our research indicates that the World Trade Organization Agreement on Government Procurement would prohibit the type of discrimination included in the proposed legislation.”
- The vast majority of U.S. trading partners have absolutely no right to retaliate if federal or state governments decides to invest its tax dollars in creating good jobs. Of the World Trade Organization’s 146 members, only 28 (including the U.S.) have signed on to the Agreement on Government Procurement, and those rules only apply among those countries that have signed on.
- India, a common destination for U.S. services contractors, is not a signatory to that agreement.
- Regarding every other country in the world, the federal and state governments have no international obligations whatsoever.
- With respect to India, last year we had an $8 billion trade deficit with that nation, in part due to the country’s continued unwillingness to lower its own barriers to U.S. exports.
- According to the Washington Post, on March 16th 2004 Secretary of State Colin Powell “pressed Indian officials to open markets to U.S. firms to help defuse the politically charged issue of the outsourcing of U.S. jobs to India. But Indian officials said they saw no link.” In other words, trade with India will for the foreseeable future continue to be a one way street and, in all likelihood, government procurement will remain closed to U.S. companies.
- Even U.S. Trade Representative Robert Zoellick has defended limits on off-shoring of federal contacts, remarking in a recent trip to India, “…one is not really in a position to complain about a government procurement arrangement if one does not belong to the government procurement agreement [at the WTO] …. India has been more reluctant to make those sort of commitments to openness.” In other words, with respect to government procurement in India, it remains a closed market to American companies.
Regarding the constitutionality of the pending Maryland legislation restricting the off-shoring of public contracts, there is no constitutional basis for challenging state procurement measures designed to support local job creation.
- As mentioned above, state laws giving preference to goods made locally and nationally have been on the books for years, and withstood judicial scrutiny.
- These laws have been upheld under the well-accepted “market participant” exception to the commerce clause, which allows states to give less favorable treatment to foreign and out-of-state providers when they do so as a “market participant” – that is, as a direct purchaser of goods using state tax revenue.
- The same logic that allows these state preferences in the procurement of goods should apply equally to the procurement of services.