The Muddles over Outsourcing
Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan*
Forthcoming in revised form:
The Journal of Economic Perspectives
Note: Readers who are not theoretically inclined may skip Section III without loss of
Critics have muddled the public debate over offshore outsourcing by using the term
interchangeably to refer to altogether different phenomena such as on-line purchase of
services, direct foreign investment and, sometimes, all imports.
We argue that clarity
requires distinguishing among these various phenomena and define outsourcing explicitly
as the services trade at arm's length that does not require geographical proximity of the
buyer and the seller—the so-called Mode 1 services in the WTO terminology—
conducted principally via the electronic mediums such as the telephone, fax and Internet.
The definition is appropriate because this is the phenomenon that is relatively new and
scary in public consciousness and has fueled the recent “outsourcing” debate.
definition, the total number of the U.S. jobs outsourced annually is minuscule and is
expected to remain so over the next decade, even on a gross basis (i.e., without adjusting
for the jobs in-sourced to the U.S.). The fears that offshore outsourcing will lead to high-
value jobs being replaced by low-value jobs down the road are also argued here to be
implausible in view of several qualitative arguments to the contrary. We also demonstrate
that offshore outsourcing of Mode 1 services raises no new analytical issues, contrary to
what many fear.
Thus, it leads to gains from trade (with the standard caveats applicable
to conventional trade in goods) and, in specific cases, to income-distribution effects.
*Jagdish Bhagwati is University Professor, Columbia University, and Andre Meyer
Senior Fellow in International Economics, Council on Foreign Relations, both in New
York, New York.
Arvind Panagariya is a Professor of Economics and the Jagdish
Bhagwati Professor of Indian Political Economy, Columbia University, New York, New
York. T.N. Srinivasan is Samuel Park Jr. Professor of Economics, Yale University, New
We acknowledge helpful comments from Alan Deardorff, Douglas
Irwin, Katherine Mann, Lori Kletzer and John Williamson and invaluable assistance from
James Hines, Andrei Shleifer, Michael Waldman and, above all, Timothy Taylor.