Shipping Jobs Overseas

I overheard a conversation at work this morning about how part of our current economic predicament is because of US companies sending jobs over seas and President Obama's plan to change our current international tax laws. I guess the idea is that US companies are moving jobs over seas to take advantage of low cost labor. Now, I am not saying that some companies are not guilty of this practice but the majority of companies that establish foreign affiliates do so for other reasons that actually help the US economy and jobs.

The main reason for operating a foreign affiliate is to sell products to foreign markets. Producing and selling your product in your target market has the added benefit of lower-cost labor, ready access to raw materials, reduced transportation costs and proximity to their ultimate customers. These give huge advantages when competing in a global market and targeting a specific foreign market. Many people cringe at the idea of low cost labor, immediately envisioning some Dickensian hell with under paid, half starved workers slaving away while American corporations get rich. But in reality the lower labor costs are typically only lower compared to US wages. Many foreign countries benefit from the presence of a multinational corporation's presence. In 2006 US owned companies employed 9.5 million foreign workers, talk about some true foreign aid! Not only that but these workers were not producing goods at a lower cost that were then shipped back overseas to be sold to Americans at a higher profit. Nearly 90% of goods produced by US foreign branches are then sold in either the host market or some other foreign market. This is not the evil multinational corporation we are used to thinking about. This is wealth being created in countries where it might not otherwise be generated and certainly not as quickly.

But what about the American worker? Surely there is some poor American out of work due to this foreign outsourcing. This is simply not so. A National Bureau of Economic Research study found "a strong positive correlation between domestic and foreign growth rates of multinational firms." And separate studies by economists have found that domestic growth can be as high as 30% of foreign growth including increased compensation for the US employees. So we see that not only are most corporations not moving jobs overseas but those that do operate there actually create more jobs here in the good old US of A.

So why do many politicians, including our President, want to crack down on the tax breaks issued to these multinational US based companies? I have no idea!! The major US tax break is a deferral of corporate taxes on foreign income until it is brought back to the US. The income is not untaxed, these monies are subject to the taxes of the host nation. This tax exemption is made to encourage reinvestment in the foreign market. Which as we have already seen leads to an increase investment in the parent company here in the US. Every modern industrial nation gives at least this much to their multinational corporations. Denying this exemption would place US based companies at a major disadvantage in foreign markets and essentially double tax the money made abroad. If politicians truly want to encourage domestic growth they should look at lowering our corporate tax rate to encourage foreign corporations to setup shop here in the US, creating more jobs and reducing our need for imports.