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Offshoring: The Next Industrial Revolution?
Alan S. Blinder

Volume 85 • Number 2

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Offshoring: The Next Industrial Revolution?
Alan S. Blinder
a controversy reconsidered In February 2004, when N. Gregory Mankiw, a Harvard professor then serving as chairman of the White House Council of Economic Advisers, caused a national uproar with a “textbook” statement about trade, economists rushed to his defense. Mankiw was commenting on the phenomenon that has beenclumsily dubbed “oªshoring” (or “oªshore outsourcing”)—the migration of jobs, but not the people who perform them, from rich countries to poor ones. Oªshoring, Mankiw said, is only “the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith. … More things are tradable than were tradable in the past, and that’s a good thing.” Although Democratic andRepublican politicians alike excoriated Mankiw for his callous attitude toward American jobs, economists lined up to support his claim that oªshoring is simply international business as usual. Their economics were basically sound: the well-known principle of comparative advantage implies that trade in new kinds of products will bring overall improvements in productivity and well-being. But Mankiw andhis defenders underestimated both the importance of oªshoring and its disruptive eªect on wealthy countries. Sometimes a quantitative change is so large that it brings about qualitative changes,
Alan S. Blinder is Gordon S. Rentschler Memorial Professor of Economics at Princeton University. He served on the White House Council of Economic Advisers from 1993 to 1994 and as Vice Chairman of theBoard of Governors of the Federal Reserve from 1994 to 1996.

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Alan S. Blinder as oªshoring likely will. We have so far barely seen the tip of the oªshoring iceberg, the eventual dimensions of which may be staggering. To be sure, the furor over Mankiw’s remark was grotesquely out of proportion to the current importance of oªshoring, which is still largely a prospective phenomenon.Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to oªshoring to date. (A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks’ worth of normal gross job losses.) However, constant improvements in technology and globalcommunications virtually guarantee that the future will bring much more oªshoring of “impersonal services’’— that is, services that can be delivered electronically over long distances with little or no degradation in quality. That said, we should not view the coming wave of oªshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannotlose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that oªshoring will bring. National data systems, trade policies, educationalsystems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now. modernizing comparative advantage Countries trade with one another for the same reasons that individuals, businesses, and regions do: to exploit their comparative advantages. Some advantages are “natural”: Texas and Saudi Arabia sit atop massive deposits of oil that are...