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What Does Obama's Remark on Offshoring Mean? Maybe Nothing

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Political conventions are mostly about rhetoric and saying what people want to hear, as all of us watching coverage of the U.S. Democratic and Republican national conventions have been reminded over the past two weeks. This is especially true of hot-button issues like offshoring.

 

So perhaps it's not surprising that India's outsourcing industry does not appear unduly concerned by Democratic nominee Barack Obama's convention remark that "companies that ship jobs overseas will not get tax breaks." An Indiatimes Infotech story quotes Som Mittal, chairman of India's National Association of Software and Services Companies (Nasscom):

Democratic governments in the past were in support of free trade as the U.S. has been all along. We don't think that practice will go when a new administration takes over early next year. The stakeholders are well aware of the advantages of outsourcing, especially in the service industry.

Mittal also says he thinks Obama's statement refers to the loss of U.S. manufacturing jobs rather than the outsourcing of IT services. True, the average U.S. voter is more aware of -- and thus more concerned about -- manufacturers moving their operations to countries like China and Mexico than companies sending IT chores to India. But if tax breaks are wrong for companies with offshore manufacturing operations, won't they also be wrong for companies sending IT tasks overseas?

 

This question points up the difficulty of attempting to apply blanket policies to a nuanced issue. And offshoring is definitely that. For every person who insists that huge numbers of U.S. jobs have been lost to offshoring, there's someone who says no real proof of this exists and, in any case, the economic gains enabled by offshoring outweigh any losses.

 

There's another problem with Obama's statement. What does it mean exactly? I am not a tax code expert, but I don't believe companies currently get any tax breaks for offshoring work. Multi-national companies can defer taxes on profits by moving money overseas, an issue larger in scope than outsourcing. And foreign governments offer some attractive financial incentives to attract U.S. investments, but again, this is a far broader issue.

 

Obama last August introduced the Patriot Employer Act, which seeks to reward American corporations with tax breaks for keeping their headquarters in the U.S. and maintaining a certain ratio of domestic-to-foreign employees, among other criteria.

 

Offshoring obviously factors into broader trade issues. Interestingly, despite an approach to trade that seems more restrictive than McCain's, Obama so far has been more popular in California's Silicon Valley, which is filled with tech companies clamoring for more H-1B visas and green cards for their foreign-born employees. Sen. Joseph Lieberman, the Connecticut Democrat who has angered members of his party with his support of McCain, recently knocked Obama for his opposition to trade agreements with Colombia and South Korea and for his apparent willingness to renegotiate the North American Free Trade Agreement.

 

A Wall Street Journal item quotes Lieberman:

... Depending on who gets elected, our policy on trade will be dramatically different and if Sen. Obama really follows through on some of the things he said, those anti-trade policies will have the net effect of--I don't want to be an alarmist--but putting us into a lot worse economically than we otherwise would be.

There's an interesting nugget on McCain's approach to trade in this Money Morning piece that compares the two candidates' positions on a number of issues, with a slant toward how these positions will affect U.S. investors. Writes Martin Hutchinson, who according to an editor's note has interviewed economic advisors for both McCain and Obama:

A further advantage of a McCain presidency could be the conclusion of more trade deals, and the consequent expansion of both world trade and of the economy in general. McCain is even more of a free trader than President Bush and has more credibility abroad; hence, it must be possible that he could make progress on the Doha Round of trade negotiations. That would be particularly important for the economies of emerging markets, which would be given greater access to the U.S. market, and reap rewards in the form of economic growth and corporate profits.

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