Offshoring of Services: An Overview of the Issues (28-NOV-05,	 
GAO-06-5).							 
                                                                 
Much attention has focused on the "offshoring" of services to	 
lower-wage locations abroad. Offshoring generally refers to an	 
organization's purchase of goods or services from abroad that	 
were previously produced domestically. Extensive public debate	 
has arisen about both the potential benefits of services	 
offshoring, such as lower consumer prices and higher U.S.	 
productivity, as well as the potential costs, such as increased  
job displacement for selected U.S. workers. In response to	 
widespread congressional interest, GAO conducted work under the  
Comptroller General's authority to help policy makers better	 
understand the potential impacts and policy implications of	 
services offshoring. This report: (1) provides an overview of	 
experts' views on the potential impacts of services offshoring,  
(2) describes the types of policies that have been proposed in	 
response to offshoring, and (3) highlights some key areas where  
additional research might help advance the debate about 	 
offshoring. In its comments, the Department of Commerce generally
agreed with the findings of this report. Commerce, Treasury, and 
the Office of the United States Trade Representative also	 
provided technical comments that have been incorporated as	 
appropriate.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-5						        
    ACCNO:   A42097						        
  TITLE:     Offshoring of Services: An Overview of the Issues	      
     DATE:   11/28/2005 
  SUBJECT:   Competition					 
	     Critical infrastructure				 
	     Developing countries				 
	     Economic analysis					 
	     Economic development				 
	     Economic growth					 
	     Economic policies					 
	     Employees						 
	     Employment 					 
	     Industrial productivity				 
	     Investments abroad 				 
	     Policy evaluation					 
	     Offshoring 					 
	     Standard of living 				 
	     Trade Adjustment Assistance Program		 

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GAO-06-5

     

     * Results in Brief
     * Background
          * Defining Offshoring
          * Types of Services Associated with Offshoring
          * U.S. Trade and Foreign Direct Investment
          * Enabling Factors and Incentives for Offshoring
          * Legislation Enacted in Response to Trade-Related Concerns
     * While Traditional Economic Theory Predicts That Offshoring W
          * Potential Impacts on the Average U.S. Standard of Living
               * Traditional Economic Theory Predicts that Offshoring Will Be
               * Some Economists Have Argued That Offshoring Could Negatively
          * Potential Impacts on Employment and Job Displacement
               * Many Economists Expect Offshoring to Have Little Effect on L
               * There is Widespread Recognition That Offshoring Will Cause S
          * Potential Impacts on the Distribution of Income
               * Some Economists Expect That Offshoring Could Affect the Dist
          * Potential Impacts on Security
               * Some Concerns Have Been Raised That Offshoring May Pose Incr
               * Concerns Have Been Raised about the Impact of Offshoring on
     * A Wide Range of Policies Have Been Proposed to Address Conce
          * Proposals to Improve the Competitiveness of the US Economy
               * Promoting Innovation
               * Improving Workforce Skills
               * Reducing Business Costs
               * Enhancing U.S. Exports
          * Proposals to Assist Workers Affected by Offshoring
               * Assisting Displaced Workers in Transition to New Employment
               * Broader Reforms of Social Insurance Programs
          * Proposals to Protect Security
               * Protecting National Security and Critical Infrastructure
               * Protecting Personal Privacy
          * Proposals to Reduce the Extent of Offshoring
               * Restricting Offshoring by Government Agencies
               * Modifying the U.S. Tax Code to Reduce Incentives for Offshor
               * Providing Incentives for Businesses to Locate Work in the U.
     * Additional Research in Key Areas May Help Advance the Offsho
     * Concluding Observations
     * Agency Comments
     * GAO Contacts:
     * Staff Acknowledgments:
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs
     * cover.pdf
          * Results in Brief
          * Background
               * Defining Offshoring
               * Types of Services Associated with Offshoring
               * U.S. Trade and Foreign Direct Investment
               * Enabling Factors and Incentives for Offshoring
               * Legislation Enacted in Response to Trade-Related Concerns
          * While Traditional Economic Theory Predicts That Offshoring W
               * Potential Impacts on the Average U.S. Standard of Living
                    * Traditional Economic Theory Predicts that Offshoring
                      Will Be
                    * Some Economists Have Argued That Offshoring Could
                      Negatively
               * Potential Impacts on Employment and Job Displacement
                    * Many Economists Expect Offshoring to Have Little Effect
                      on L
                    * There is Widespread Recognition That Offshoring Will
                      Cause S
               * Potential Impacts on the Distribution of Income
                    * Some Economists Expect That Offshoring Could Affect the
                      Dist
               * Potential Impacts on Security
                    * Some Concerns Have Been Raised That Offshoring May Pose
                      Incr
                    * Concerns Have Been Raised about the Impact of
                      Offshoring on
          * A Wide Range of Policies Have Been Proposed to Address Conce
               * Proposals to Improve the Competitiveness of the US Economy
                    * Promoting Innovation
                    * Improving Workforce Skills
                    * Reducing Business Costs
                    * Enhancing U.S. Exports
               * Proposals to Assist Workers Affected by Offshoring
                    * Assisting Displaced Workers in Transition to New
                      Employment
                    * Broader Reforms of Social Insurance Programs
               * Proposals to Protect Security
                    * Protecting National Security and Critical
                      Infrastructure
                    * Protecting Personal Privacy
               * Proposals to Reduce the Extent of Offshoring
                    * Restricting Offshoring by Government Agencies
                    * Modifying the U.S. Tax Code to Reduce Incentives for
                      Offshor
                    * Providing Incentives for Businesses to Locate Work in
                      the U.
          * Additional Research in Key Areas May Help Advance the Offsho
          * Concluding Observations
          * Agency Comments
          * GAO Contacts
          * Staff Acknowledgments
          * GAO's Mission
          * Obtaining Copies of GAO Reports and Testimony
               * Order by Mail or Phone
          * To Report Fraud, Waste, and Abuse in Federal Programs
          * Congressional Relations
          * Public Affairs

Offshoring of Services 

Contents

Letter 1

Results in Brief 2
Background 5
While Traditional Economic Theory Predicts That Offshoring Will Benefit
the Overall Economy, Concerns Have Been Raised about Four Areas of
Potential Impact 13
A Wide Range of Policies Have Been Proposed to Address Concerns about
Offshoring's Potential Impacts 40
Additional Research in Key Areas May Help Advance the Offshoring Debate 50
Concluding Observations 59
Agency Comments 60
Appendix I Scope and Methodology 64
Appendix II List of Experts Interviewed 66
Appendix III Comments from the Department of Commerce 69
Appendix IV GAO Contacts and Staff Acknowledgments 70
GAO Related Products 71
Bibliography 73

Table

Table 1: Some Key Areas for Additional Research on Services Offshoring and
Possible Approaches for This Research 54

Figures

Figure 1: Overall U.S. Trade Balance and Trade Balance in Services 8
Figure 2: Timeline of Legislation Enacted in Response to Trade-Related
Concerns 12
Figure 3: Four Areas of Potential Impact of Offshoring 14
Figure 4: Real Hourly Wage Growth and Labor Productivity Growth, Wages,
and Labor Compensation as a Share of National Income 21

Abbreviations

BEA Bureau of Economic Analysis

BLS Bureau of Labor Statistics

BPT business, professional, and technical

COTS commercial off the shelf

DOD Department of Defense

GAO Government Accountability Office

IT information technology

MLS Mass Layoff Statistics

TAA Trade Adjustment Assistance

VAT value-added tax

WARN Worker Adjustment and Retraining Notification

WIA Workforce Investment Act of 1998

WTO World Trade Organization

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separately.

United States Government Accountability Office

Washington, DC 20548

November 28, 2005

Congressional Committees

Although "offshoring" has existed for decades in the manufacturing sector,
recently concerns have been raised about the emergence of services
offshoring. Offshoring generally refers to the practice, by either U.S.
companies or government entities, of replacing goods or services
previously produced domestically with goods and services produced abroad.
Advances in information technology (IT) and developments in the management
of business processes, coupled with a large pool of educated workers in
other countries, allow companies to move services work outside of the U.S.
as part of a larger trend toward global interdependence. For example, U.S.
companies are now able to move software programming, accounting, or
telephone call center services to lower-wage locations such as India, the
Philippines, and Eastern Europe. While U.S. government data have
limitations, these data indicate that in recent years the imports of
services associated with offshoring have been growing.1 This has
contributed to heightened public debate about both the potential benefits
of services offshoring, such as lower consumer prices and higher U.S.
productivity, as well as the potential costs, such as increased job
displacement for U.S. workers.

Services offshoring raises issues on a wide array of topics, including the
economy, workforce, consumer privacy, and national security. Moreover,
various pieces of federal and state legislation have been introduced, such
as bills to restrict the offshoring of some government services or to
provide more assistance for displaced workers. In response to widespread
congressional interest, we have prepared this report under the Comptroller
General's authority to help the Congress understand and examine the
potential impacts and policy implications of services offshoring. As this
report may prove helpful in the deliberations of committees with oversight
responsibilities or jurisdiction over issues raised by offshoring, we have
addressed this report to these committees. Although this report focuses on
services offshoring, much of our discussion is applicable to offshoring in
the manufacturing sector as well.

1GAO, International Trade: Current Government Data Provide Limited Insight
into Offshoring of Services, GAO-04-932 (Washington D.C.: Sept. 22, 2004).

This report addresses three broad areas. First, it provides an overview of
experts' views on the potential effects of offshoring. Where possible, we
identify empirical research that provides support for various views. Where
experts express different opinions on the potential effects of offshoring,
we highlight the key issues that underlie the debate. However, the report
does not attempt to resolve such differences in views. Second, the report
provides an overview of the various types of policies that have been
proposed in response to offshoring. We generally categorize policy
proposals on the basis of the broad concerns that they seek to address,
and we provide illustrative examples of policies that have been proposed.
Third, the report highlights some key areas where additional research
might advance the debate about the effects and policy implications of
offshoring. Our discussion identifies some relevant data sources and
potential approaches for such research.

To carry out this study, we conducted an extensive literature review and
interviewed a wide range of experts, often with conflicting points of
view, from academia, government, think tanks, industry groups, and labor
groups (see app. II for a list of experts interviewed). In addition, we
attended several conferences to hear presentations on services offshoring
and dialogue with experts during the course of our work. We conducted our
review from May 2004 through November 2005 in accordance with generally
accepted government auditing standards. See appendix I for a detailed
discussion of our scope and methodology.

                                Results in Brief

While traditional economic theory predicts that offshoring is likely to
benefit the overall economy, concerns have been raised about four areas of
potential impact: on the average U.S. standard of living, employment and
job loss, income distribution, and security. Observers of offshoring have
expressed a range of views about the likely impact of offshoring on each
of these areas. These debates reflect several factors: the fact that
services offshoring is a relatively recent development whose impact is not
fully known, the limitations of currently available data about the extent
of offshoring and its impacts, and different theoretical expectations
about how services offshoring will impact the U.S. economy.

           o  Potential impacts on the average U.S. standard of living:
           Traditional economic theory on international trade predicts that
           in the long run, offshoring is likely to be beneficial for the
           average U.S. standard of living; however, some economists have
           argued that offshoring could harm U.S. living standards if it
           contributes to the erosion of important U.S. industries,
           undermines U.S. technological leadership, or leads to a decrease
           in average U.S. wages. Underlying this debate are different
           predictions about what new areas of comparative advantage the U.S.
           will develop as globalization intensifies-that is, what new goods
           and services will be developed that are produced most efficiently
           in the U.S.-and different assessments about whether offshoring is
           contributing to downward pressure on U.S. wages.

           o  Potential impacts on employment and job displacement: Many
           economists agree that offshoring is not likely to affect aggregate
           U.S. employment in the long run but acknowledge that in the short
           run some workers will lose their jobs when employers relocate
           production abroad. In addition, some economists argue that an
           important effect of offshoring and increased trade are structural
           changes that will generate permanent shifts in the types of work
           conducted by the U.S. labor force. However, there is debate about
           the expected magnitude of job losses related to offshoring, the
           implications of job displacement for those workers who are
           directly affected by it, and the expected direction of any
           structural changes in the labor market caused by offshoring.

           o  Potential impacts on distribution of income: There is
           disagreement among economists about whether offshoring is likely
           to significantly affect the distribution of income in the U.S.
           Some economists have expressed concern that offshoring could
           accelerate income inequality in the U.S.; however, others argue
           that changes in the income distribution are driven primarily by
           factors unrelated to offshoring, such as technological
           developments, and still others point out that offshoring could
           potentially decrease income inequality. Underlying these
           disagreements are debates about the extent to which, in the long
           run, offshoring will change the demand for U.S. workers at various
           income and skill levels.

           o  Potential impacts on national security and consumer privacy:
           Experts express varying degrees of concern about the impact of
           services offshoring on the security of our national defense system
           and critical infrastructure-systems and structures that are
           essential to the nation, such as utilities and communication
           networks-as well as the privacy and security of consumers'
           financial and medical information. Underlying these debates are
           unresolved questions about the extent to which offshore
           operations, such as software development or medical records
           processing, pose increased security risks and the extent to which
           current laws and practices mitigate these risks.

           Analysts of the offshoring phenomenon have proposed a broad range
           of policies in response to offshoring, and these proposals
           represent a diverse set of potential directions for public policy
           in this area. We have categorized these proposals into four areas;
           some analysts have recommended policies in more than one area.

           o  Proposals to improve U.S. global competitiveness: Many
           observers view offshoring as one aspect of a much broader process
           of increasing global interdependence and propose policies that
           seek to improve the ability of U.S. firms and workers to compete
           in the global economy. Proponents of these policies contend that
           increased foreign competition signals a need for policies to help
           the U.S. economy strategically develop new areas of comparative
           advantage. Examples of these proposals include increasing
           government support for research and development and improving
           education and training of U.S. workers.

           o  Proposals to address effects on the workforce: In response to
           concerns about job displacement due to offshoring, many have
           proposed policies to assist displaced workers who bear the
           immediate costs of offshoring. Some proposals would build on
           existing programs, such as extending the Trade Adjustment
           Assistance program to dislocated services workers. Currently, the
           program provides workers in the manufacturing sector who are
           dislocated due to trade with extended unemployment benefits and
           subsidized retraining. Other proposals would involve broader and
           more extensive reforms, such as instituting a wage insurance
           program to replace a portion of wages at reemployment for workers
           who experience wage declines after displacement or establishing
           universal or portable health insurance.

           o  Proposals to enhance security: Some proposals seek to address
           concerns that offshoring could pose risks to national security,
           critical infrastructure, or the privacy of personal data. These
           proposals can be broadly categorized into two types-those that
           would restrict the type of work that can be sent to foreign
           locations and those that would strengthen requirements governing
           security and data protections.

           o  Proposals to reduce the extent of offshoring: Some policy
           proposals address concerns about offshoring by government agencies
           or the private sector by seeking to reduce the extent of
           offshoring's occurrence. For example, some proposals would
           prohibit or constrain offshoring in government procurement. Other
           proposals seek to modify firms' incentives to offshore by altering
           tax provisions or enhancing incentives for firms to locate work in
           the U.S.

           Determining appropriate policy responses to the offshoring
           phenomenon is especially challenging due to the limited state of
           knowledge about offshoring and its effects. Nonetheless, areas
           where further research might help advance the debate about the
           impacts and policy implications of services offshoring include

           o  impacts of offshoring on various sectors of the U.S. economy,
           particularly sectors that are emerging as new sources of
           comparative advantage;

           o  impacts of offshoring on the workforce, such as numbers of
           workers displaced and their reemployment experiences;

           o  impacts of offshoring on the U.S. income distribution,
           including trends in wage levels of jobs moving offshore; and

           o  any increased security-related risks posed by offshoring and
           the extent to which these are mitigated by current practices and
           laws.

           Further research in these areas could help inform policy making by
           providing more information about the nature and magnitude of any
           problems resulting from offshoring. Researchers have begun to use
           a variety of approaches to examine these areas, such as in-depth
           studies of services offshoring in particular industries (e.g.,
           semiconductors and radiology) and statistical methods applied to
           current federal data series (e.g., to obtain information on the
           re-employment experiences of workers dislocated due to trade).
           While these approaches face various challenges and limitations,
           they offer some prospect for additional insights on aspects of the
           services offshoring phenomenon.

           In its comments, the Department of Commerce generally agreed with
           our observations. Commerce stated that it appreciated the
           thoroughness of our review and that the report will be a useful
           reference starting point for discussions of the causes and impacts
           of offshoring. Commerce, Treasury, and the Office of the United
           States Trade Representative also provided technical comments,
           which we incorporated into the report as appropriate.

           Offshoring generally refers to a company's purchases from abroad
           (imports) of goods or services that were previously produced
           domestically. A company may offshore services either by purchasing
           services from another company based overseas or by obtaining
           services in-house through an affiliate located overseas. For
           example, a U.S.-based company might stop producing parts of its
           accounting and payroll services in-house and instead outsource
           them to a foreign-based company. A U.S.-based multinational
           company might also offshore by moving parts of its accounting and
           payroll services from its domestic operations to its foreign
           affiliate, thus keeping the services in-house. Importing services
           that had previously been acquired domestically or relocating
           services to foreign affiliates both can result in the displacement
           of U.S. service production and employment, though as we discuss
           later, will likely have other economic effects, such as on
           consumer prices and productivity.

           However, other business activities that do not directly result in
           the displacement of U.S. workers are sometimes included in broader
           definitions of offshoring. Offshoring could include other business
           activities that may result in foregone job creation domestically
           but would not result in job losses. For example, a U.S.-based
           company might expand its accounting and payroll services through a
           foreign company or affiliate, but do so without affecting its U.S.
           workforce.2

           Broader definitions of offshoring sometimes include the movement
           of production offshore. This definition of offshoring focuses on
           U.S. companies' investing in overseas affiliates. Offshoring
           defined in this way could but would not necessarily result in the
           displacement of U.S. service production or employment. For
           example, a U.S.-based company investing in its overseas affiliate
           to produce accounting and payroll services to sell to other
           companies abroad might do so without affecting its production and
           employment levels in the U.S.

           Types of services associated with offshoring tend to be those that
           are capable of being performed at a distance and whose product can
           be delivered through relatively new forms of advanced
           telecommunications. Examples of these business functions include
           software programming and design, call center operations,
           accounting and payroll operations, medical records transcription,
           paralegal services, and software research and testing.

           More than three-quarters of U.S. private-sector employees are in
           service-providing industries; however, not all services jobs are
           likely to be at risk from offshoring.3 Many services jobs, such as
           child care providers and hairdressers, require face-to-face
           contact with customers. Other jobs, such as transportation
           workers, construction workers, and auto mechanics, require
           hands-on contact with physical equipment. In addition, some work,
           such as marketing and creative design, may be done more
           efficiently and productively in close proximity to customers and
           other workers.

           While government data on trade and foreign direct investment offer
           limited insight into the extent of offshoring, the data provide
           some evidence that services imports are growing.4 Trade data from
           the Department of Commerce's Bureau of Economic Analysis (BEA)
           show that imports of services associated with offshoring are
           growing. For example, U.S. imports of business, professional, and
           technical services grew from $20.8 billion in 1997 to $40.7
           billion in 2004-an increase of about 10% per year.5 It is
           important to note that these import data show that U.S. entities
           have been purchasing these services offshore, but the data do not
           indicate whether these entities had previously been purchasing
           these services from domestic U.S. sources.

           The U.S., Canada, and the United Kingdom are among the world's
           leading exporters of services. According to World Trade
           Organization data, the U.S. was the world's largest exporter of
           commercial services in 2004.6 BEA data show that in 2004 Canada
           and the United Kingdom accounted for 42 percent of the U.S.'s
           imports of unaffiliated business, professional, and technical
           (BPT) services, or BPT services traded between firms that are
           separate entities from each other.

           The U.S. currently exports more services than it imports and
           therefore maintains a trade surplus in services overall. In 2004,
           this surplus was nearly $48 billion, according to BEA data.
           However, since 1997, the trade surplus in services has generally
           been shrinking. At the same time, the overall trade deficit has
           generally been expanding (see fig. 1), though imported services
           comprise a small share (about 17 percent) of total U.S. imports of
           goods and services.

           Figure 1: Overall U.S. Trade Balance and Trade Balance in Services

           BEA data on direct investment abroad capture U.S. multinational
           companies' establishment of affiliates abroad, including
           establishment of affiliates to produce services. The data suggest
           that most services produced abroad by U.S. majority-owned foreign
           affiliates are sold to foreign markets rather than to the U.S. In
           addition, the data show that U.S. direct investment abroad tends
           to be concentrated in other developed countries, rather than in
           developing countries frequently associated with services
           offshoring. For example, according to BEA data, 61 percent of U.S.
           direct investment abroad in 2004 took place in the European Union,
           Canada, and Japan. In the same year, U.S. direct investment in
           developing countries that are frequently cited as suppliers of
           offshore services (e.g., India, the Philippines, Malaysia, and
           China) was relatively small-about 1 percent or less of total U.S.
           direct investments in each case.7 In addition, BEA data from 2003
           show that over nine-tenths of services sold by U.S.-majority-owned
           nonbank foreign affiliates are sold to foreign markets rather than
           to the U.S.

           BEA data also show that the U.S. receives large amounts of direct
           investment by other countries. In 2004, the U.S. received nearly
           $96 billion in foreign direct investment. The countries that are
           the largest recipients of U.S. foreign direct investment abroad
           are also the largest foreign direct investors in the U.S., with
           the European Union, Japan, and Canada accounting for 82 percent of
           foreign direct investment in the U.S. Foreign firms investing in
           the U.S. employ U.S. workers. U.S. affiliates of foreign
           multinational corporations employed 5.3 million U.S. workers in
           2003, accounting for 5 percent of total U.S. employment in private
           industries.8

           Firms have been offshoring long before the recent trend in
           services offshoring. In previous decades, U.S. manufacturing
           companies were motivated to offshore because of the low costs and
           availability of skilled labor, production and supply networks in
           some developing countries, and reductions in cost of transporting
           goods. At the same time, U.S. companies divided their production
           processes into discrete pieces, which allowed them to offshore
           some of the components. As a result, some businesses offshored
           total production, and others offshored parts of the production
           process. Firms generally retained higher-end, higher-skilled
           services functions in the U.S., such as management, finance,
           marketing, and research and development.

           Offshoring has recently expanded into services due to three key
           factors. First, technological advances, such as advances in
           telecommunications and the emergence of the Internet, have enabled
           workers in different locations in the world to communicate and be
           connected electronically and has also facilitated the digitization
           and standardization of activities needed to complete business
           processes. These changes in turn have allowed business processes
           to be divided into smaller components, some of which could be done
           in different locations. For example, standardized software has
           made it possible for firms to outsource financial or human
           resources activities to a separate overseas company that performs
           them for many clients, rather than handling the functions
           internally.9 Thus, in many cases, the offshoring of services
           constitutes an outgrowth of outsourcing business functions.
           Second, countries such as India, China, Russia, and much of
           Eastern Europe have increasingly opened their borders to the
           global economy. Third, other countries have highly educated
           populations with the technical skills for performing services and
           technology-related work.

           According to several business studies, a primary reason that
           organizations engage in offshoring is to reduce costs.10 The cost
           savings from offshoring are primarily the result of differences
           between the U.S. and developing countries in the unit cost of
           labor, the worker compensation (wages and benefits) that must be
           paid to produce one unit of goods or services. Unit labor costs
           are lower for certain services in developing countries primarily
           because workers' wages in those countries are lower than in the
           U.S. However, unit labor costs also depend upon the productivity
           levels of workers. Although labor costs in a developing country
           may be lower than in the U.S., it may still be possible for the
           unit cost of labor to be lower in the U.S. than the other country
           if U.S. workers' productivity is much higher, meaning than the
           U.S. worker can produce many more or higher quality products
           within a certain time frame than a worker in the other country.
           Differences in unit labor costs can also result from differences
           in costs of employee benefits, such as health care and pension
           benefits. In addition, cost savings can be affected by currency
           exchange rates, countries' tax policies, and government-provided
           incentives such as tax rebates.

           Aside from cost savings, firms may have other incentives to
           offshore. Access to a workforce in different time zones across the
           globe may enable companies to conduct work around the clock and
           consequently meet worldwide customer needs. Establishing a
           presence in foreign countries can provide companies access to
           overseas markets. In addition, offshoring non-core services can
           enable companies to focus their resources on their core functions.
           By outsourcing non-core functions to overseas firms that
           specialize in them, businesses may also experience improvements in
           the quality of these functions.

           Although firms may have many incentives to offshore, they may also
           face disincentives to offshore. Offshoring has several costs
           associated with it, including costs to start up an offshore
           operation and to manage and train an offshore workforce. In
           addition, some experts have noted that wages of workers in
           developing countries are rising more rapidly than U.S. wages,
           therefore shrinking the cost savings of offshoring over time.11
           Furthermore, offshoring carries potential risks, such as possible
           political instability in overseas locations, less reliable civil
           infrastructure, exchange rate volatility, less developed legal and
           regulatory systems, and risks to intellectual property.

           In the last few decades, the Congress has enacted various pieces
           of legislation related to trade and increasing global
           interdependence, primarily due to concerns about their effects on
           the manufacturing sector. (See fig. 2.)12 This legislation sought
           to expand U.S. exports; establish fair trading practices; assist
           workers, firms, and communities adversely affected by trade; and
           improve U.S. competitiveness through support for education and
           research and development. For example, trade acts of 1962, 1974,
           and 1979 sought to expand U.S. exports by establishing mechanisms
           for negotiating and entering into trade agreements. The trade acts
           also established remedies for industries hurt by import
           competition through unfair trade practices. The Trade Act of 1974,
           as amended, established a trade adjustment assistance program to
           provide financial assistance and retraining to workers involved in
           the manufacturing of articles who lost their jobs due to foreign
           competition. In addition, the act also established a program that
           enabled manufacturing firms and communities hurt by trade to
           receive technical assistance and financial support to develop new
           strategies to improve their competitiveness. Congress enacted
           various other legislation to enhance the competitiveness of the
           U.S. economy by improving education and supporting research and
           development. Among others, these included the Stevenson-Wydler
           Technology Innovation Act of 1980, which authorized the creation
           of various technology centers. With regard to services
           specifically, the Trade and Tariff Act of 1984 required the
           Commerce Department to establish a program on international trade
           in services and to issue a report every 2 years.13 In addition,
           the Omnibus Trade and Competitiveness Act of 1988 directs the
           Secretary of Commerce to conduct a benchmark survey of services
           transactions.

           Figure 2: Timeline of Legislation Enacted in Response to
           Trade-Related Concerns

           Aside from these laws, other legislation enacted by the Congress
           may address some concerns raised by trade and globalization. For
           example, under the Workforce Investment Act of 1998 (WIA), the
           Department of Labor oversees an employment and training system
           operated by states and localities to assist displaced workers in
           obtaining new jobs, which could include workers who become
           displaced due to trade-related reasons.14 WIA funds may also be
           used to provide training for employed workers to upgrade their
           skills.

           Traditional economic theory predicts that expansion of
           international trade, including offshoring, will have beneficial
           effects on the U.S. economy, but a number of concerns have also
           been raised about the potential economic and social impacts of
           offshoring. We have identified four areas of concern about the
           potential impacts of offshoring: potential impacts on the average
           U.S. standard of living, including average wages; employment and
           job displacement among American workers; the distribution of
           income; and national security and consumer privacy. Economists and
           other policy analysts have expressed in literature and in
           interviews with us a range of views about the likely impacts of
           offshoring on each of these areas. This diversity of views
           reflects several factors: the fact that services offshoring is a
           relatively recent development in international trade whose impact
           is not yet fully known; the limitations of currently available
           data about the extent of offshoring and its impacts; and different
           theoretical expectations about the likely impact of expanded trade
           in services on the U.S. economy. The issues identified in this
           section may not be exhaustive; others may raise concerns about
           offshoring that are not discussed in this report. Figure 3
           summarizes experts' different views about the four areas of
           potential impact for the U.S. that we identify.

           Figure 3: Four Areas of Potential Impact of Offshoring

           Traditional economic theory on international trade predicts that
           offshoring is likely to be beneficial for the average U.S.
           standard of living in the long run; however, some economists have
           argued that offshoring could harm U.S. living standards.
           Economists who contend that offshoring will increase average U.S.
           living standards expect that it will do so through raising
           productivity (and thereby increasing national income), increasing
           average wages for American workers, and providing consumers with
           lower prices and access to a broader range of goods and
           services.15 In addition, they expect that U.S. companies will
           respond to the challenges of international competition by
           developing new areas of specialization in the global economy.
           Economists who argue that offshoring may lower U.S. average living
           standards focus on the possibility that offshoring may contribute
           to a decline in the strength of some U.S. industries and may
           threaten U.S. leadership in innovation and technological
           development. Some economists also focus on the possibility that
           offshoring may lead to downward pressure on U.S. wages even if it
           has positive effects on the U.S. economy overall. Underlying these
           disagreements are different predictions about what areas will
           emerge as new sources of comparative advantage in the global
           economy, as well as different assessments about whether offshoring
           is contributing to downward pressure on U.S. wages.

           Effects on Productivity: Offshoring of services represents an
           expansion of trade into sectors of the economy that in the past
           were relatively untraded; as such, many economists we interviewed
           or who have published literature on offshoring expect offshoring
           to increase productivity in these sectors. Offshoring is expected
           to lead to productivity increases through several mechanisms.
           First, increased competition could lead to pressures for greater
           efficiency, causing least productive firms to exit the market so
           that firms that remain in the market are increasingly focused on
           managing for greatest productivity. Second, offshoring-like
           domestic outsourcing-could enable U.S. firms to specialize in the
           core functions in which they add the greatest value, while moving
           lower-value job functions out of the country. As U.S. firms
           reallocate resources toward higher-value activities, moving
           lower-value activities overseas, the U.S. economy overall could
           see productivity gains. Third, offshoring could enhance
           productivity by promoting reductions in the costs of technology
           and other inputs that improve the efficiency of business
           processes. For example, some economists have argued that
           offshoring of IT services will reduce the cost of these services,
           making IT-enabled products and services more affordable and
           leading to increased diffusion of productivity-enhancing
           technology throughout many industries.16 For instance, the lower
           cost of offshored health-record transcription services might
           encourage more health care providers to keep digitized medical
           records, improving the efficiency and productivity of the health
           care industry.

           Because the acceleration in services offshoring is a relatively
           recent phenomenon, empirical evidence about its effects on the
           productivity of the U.S. economy remains preliminary. However, the
           effects of offshoring in manufacturing have been observed over
           many years and can shed some light on the potential impact of
           services offshoring on U.S. productivity. A number of research
           studies suggest that offshore outsourcing contributed to
           productivity improvements in U.S. manufacturing. Catherine Mann,
           among others, has argued that offshoring in the production of
           computer hardware-along with domestic innovation-kept prices of
           new hardware low and thereby played a role in the deepening of IT
           investment throughout the U.S. during the 1980s and 1990s.17 Since
           the mid-1990s, the U.S. has experienced a period of unusually
           rapid productivity growth, which many attribute to accelerating
           investment in IT and the rapid diffusion of new applications and
           uses that occurred in the 1980s and 1990s.18

           New Areas of Comparative Advantage: Traditional economic theory
           also predicts that increased trade-including offshoring-will
           increase economic growth, and therefore average living standards
           in the long run, by driving the economy to develop new innovative
           and high-value areas of comparative advantage-that is, to
           specialize in the creation of high-value goods and services that
           are produced most efficiently in the U.S.19 Although increased
           competition due to offshoring and other trade may lead to
           contraction of production and employment within some U.S.
           industries, trade is also expected to reallocate the resources of
           the U.S. economy to sectors that are comparatively more efficient,
           such that U.S. companies are expected to eventually develop new
           areas of comparative advantage in the global economy that will
           lead to continued economic growth. Some economists contend that
           advantages that the U.S. has over less developed countries, such
           as a relatively high-skilled workforce, abundance of capital, and
           well-developed financial markets and investment opportunities will
           enable the U.S. economy to specialize in higher-value work. In
           particular, they expect that offshoring will contribute to the
           reduction or elimination of certain lower-skilled occupations in
           the U.S., but lead to the creation of new jobs in occupations that
           require higher levels of skill, shifting U.S. production and the
           distribution of employment to fields with higher returns.20

           Some empirical studies suggest that the U.S. economy has
           historically developed new high-value areas of comparative
           advantage as trade has increased. The process of the U.S.
           developing higher-value areas of comparative advantage as
           lower-value work is moved offshore has been observed over many
           years in some manufacturing industries. For example, in the
           semiconductor industry, assembly work that was originally
           conducted in the U.S. began to be moved offshore in the 1960s.
           Although this offshoring did lead to job losses in the U.S.,
           economists Clair Brown and Greg Linden assert in their research
           that this movement also kept the U.S. semiconductor industry
           competitive and permitted the U.S. industry to specialize in
           higher-value work within the industry. According to Brown and
           Linden, as chip assembly moved offshore, U.S. firms specialized in
           higher-value fabrication work, and when fabrication work began to
           move offshore, U.S. firms specialized in design.21 Offshoring of
           services has not been occurring long enough to observe the
           relationship between offshoring and the emergence of new areas of
           specialization; however, economists J. Bradford Jensen and Lori
           Kletzer have argued that recent data demonstrates that workers in
           industries and occupations that are more likely to be affected by
           international trade tend to have higher wages and higher skills
           than workers in "non-tradable" service sector jobs, which is
           consistent with the hypothesis that offshoring and globalization
           is leading the U.S. economy to specialize in higher-value work.22
           Historical trends also suggest that openness to trade has
           increased the economy's aggregate output in the past. The U.S.
           economy has grown as trade has expanded, and internationally,
           there is some evidence that countries that are more open to trade
           typically experience faster growth than those that are more
           closed.23

           Effects on Wages: Some economists also argue that offshoring could
           increase average living standards by contributing to growth in
           average real wages for U.S. workers, corresponding to offshoring's
           effects on productivity. Economic theory predicts that average
           real wages should typically rise with average productivity rates,
           as workers are compensated for producing more per hour of work.
           Wages are expected to move with productivity growth in the long
           run if the share of national income that accrues to workers versus
           the share that accrues to firms' profits and other income remains
           fairly constant. Historically, wage growth in the U.S. has broadly
           tracked productivity growth, although changes in wages and
           productivity may have diverged for periods of time (see fig. 4).
           During the post-World War II period, the share of national income
           spent on total compensation-wages and benefits-rose throughout the
           1950s, 1960s, and 1970s, and has been fairly constant since 1980,
           averaging about 66 percent of national income, with the remainder
           accruing to corporate profits, proprietor's income, rental income,
           and net interest.24 Since 1970, an increasing amount of total
           labor compensation has been spent on benefits rather than wages
           and salaries. In recent years-since the end of the 2001
           recession-wages have not moved up with productivity growth, and
           total labor compensation as a share of national income has
           declined somewhat, from 66 percent in 2001 to 64 percent in 2004.
           During this time, wages and salaries as a share of national income
           declined from 55 percent in 2001 to 52 percent in 2004. Some
           economists have argued that this divergence of compensation growth
           from productivity growth is problematic and runs counter to
           assertions that increased productivity gains from offshoring will
           necessarily raise average living standards; however, this
           fluctuation is considered by other economists to fall within
           recent norms.

           Figure 4: Real Hourly Wage Growth and Labor Productivity Growth,
           Wages, and Labor Compensation as a Share of National Income

           Note: Total compensation includes wages and salaries, plus
           employers' contributions for employee pension and insurance funds
           and government social insurance. Productivity growth and hourly
           compensation growth are both obtained from the Bureau of Labor
           Statistics' (BLS) "Productivity and Costs" data series. Both of
           these measures are highly cyclical and have therefore been
           averaged over each business cycle (peak to peak) in order to more
           easily show trends over time. Productivity growth is seasonally
           adjusted nonfarm business output per hour. Hourly compensation
           includes wages and salaries of employees plus employers'
           contributions for social insurance and private benefit plans.
           Except for nonfinancial corporations, where there are no
           self-employed, data also include an estimate of wages, salaries,
           and supplemental payments for the self-employed. Hourly
           compensation growth is deflated in recent quarters based on the
           Consumer Price Index for all urban consumers (CPI-U). The trend
           from 1978-2004 is based on the Consumer Price Index research
           series (CPI-U-RS).

           Effects on Prices and Availability of Consumer Goods and Services:
           Traditional economic theory also predicts that offshoring will
           improve average U.S. living standards by lowering consumer prices
           and providing consumers access to a wider range of goods and
           services than would otherwise be available. Many economists expect
           that competition will lead companies to pass the cost savings from
           offshoring onto consumers in the form of lower prices. However,
           economic theory also predicts that the extent to which cost
           savings are passed onto consumers depends on how competitive the
           market is for particular goods and services. While firms in highly
           competitive markets are likely to pass most of the cost savings
           from offshoring through to the purchasers of the service, in less
           competitive markets, economic theory predicts that firms may
           retain some or all of the cost savings.25

           Although the most commonly cited economic trade theories predict
           that offshoring will likely have positive effects on the average
           U.S. living standard, some trade models generate scenarios under
           which the U.S. could lose either its absolute or relative position
           in the global economy, and some economists have argued that
           services offshoring is better described by these latter types of
           economic models.26 Models in which the U.S. could face potential
           losses from increased trade such as offshoring reflect the
           possibility that as our trading partners become more productive in
           creating goods and services that the U.S. specializes in, the
           economic position of the U.S. could be undermined. For example,
           Ralph Gomory and William Baumol have described scenarios in which
           a trading partner experiences productivity improvements in an
           important U.S. export industry, resulting in declines in U.S.
           national income because U.S. firms lose their position as the most
           competitive producers in the industry.27 The impact on the U.S.
           workforce, in this model, is particularly detrimental if the
           industry in which the U.S. is challenged is highly profitable and
           pays high wages, such as industries in which the U.S. has long
           held technological superiority or an industry that is difficult to
           enter.28 Other economists have developed different models in which
           productivity changes abroad lead to losses in the absolute or
           relative position of the U.S. in the global economy.29 The
           negative results of increased trade in these models are not
           specific to offshoring-they could result from other forms of trade
           too, but they are sometimes cited when concerns about offshoring
           are raised because services offshoring raises the specter of the
           movement of high-value work from the U.S. to foreign trading
           partners.

           Some have raised concerns that offshoring poses risks to U.S.
           leadership in innovation, particularly in high-value areas such as
           technology fields and research and development, raising the
           possibility that the global economic position of the U.S. could be
           eroded over time.30 Economists and other offshoring observers have
           suggested a range of mechanisms through which offshoring could
           have a negative impact on U.S. innovation. Some argue that
           innovation results from solving technical problems during
           manufacturing, design, and research and development. To the extent
           that this work is conducted overseas, offshoring could promote
           faster technological diffusion to foreign firms, which may over
           time lead to foreign competitors coming to dominate an industry in
           which the U.S. was once the technological leader. Some contend
           that offshoring portions of the research and development
           infrastructure could threaten U.S. technological leadership by
           disrupting important innovation networks in the U.S., such as the
           IT cluster in Silicon Valley in California, or the biotechnology
           cluster in Cambridge, Massachusetts, and promoting the emergence
           of such networks abroad. In addition, some express concern that
           offshoring routine or entry-level work in some technical
           industries could hurt the U.S.'s ability to maintain an innovative
           workforce by closing off career prospects for some U.S. workers
           and discouraging U.S. students from entering those fields.

           Another concern raised by some economists is that offshoring could
           reduce average living standards for American workers by slowing
           the growth of average wages. These economists raise the concern
           that even if offshoring promotes economic growth and productivity,
           it could decrease labor's share of national income by subjecting
           American workers to direct competition with foreign workers,
           leading to slower growth or even a decline in average wages.31 As
           we previously noted, recent statistics show a dip in the share of
           national income accruing to total worker compensation in recent
           years, and some economists believe that offshoring may be
           contributing to this trend.

           Finally, some question whether firms will use the cost savings
           from offshoring in ways that lead immediately to the productivity
           improvements and consumer price reductions predicted by trade
           theory.32 Under certain market conditions, an individual firm
           could retain supernormal profits (profits above the usual for
           their particular industry and product) for a period of time,
           distributing these gains to shareholders or their remaining
           employees, rather than passing on cost savings to consumers in the
           form of price reductions or investing their cost savings in
           productivity-enhancing reorganization or new technology. Although
           economic theory predicts that under many market conditions
           competitive forces will constrain the ability of firms to earn
           supernormal profits on an ongoing basis, the assumption that
           individual firms face perfectly competitive market conditions may
           not necessarily be accurate. Thus, some offshoring experts stress
           the importance of examining firm-level decisions to determine
           whether, how, and how quickly offshoring leads to price reductions
           and the reorganization of firms and industries toward
           specialization in higher-productivity activity.

           Underlying the debate about the effects of offshoring on the
           average U.S. standard of living are different perspectives on the
           following questions:

           o  What new areas of comparative advantage will the U.S. economy
           develop to compensate for declines, if any, in areas threatened by
           offshoring?

           o  How will offshoring affect average U.S. wages? Will the
           possible benefits of productivity gains offset the possible
           downward pressure exerted by increased exposure of U.S. workers to
           global competition?

           Many economists agree that offshoring is not likely to affect
           aggregate U.S. employment in the long run, but acknowledge that in
           the short run, workers will lose their jobs when employers
           relocate production abroad. At the same time, some economists have
           commented that offshoring may cause structural changes in the
           labor market because increased trade alters the mix of goods and
           services produced in the U.S. These structural changes could
           generate permanent changes in the types of work conducted by the
           U.S. labor force and could also possibly have longer-term effects
           on the U.S. unemployment rate. There is disagreement about the
           expected direction of any structural changes in the labor market
           due to offshoring, the expected magnitude of job displacement due
           to offshoring, and the implications of this displacement for those
           workers who are directly affected by it. Underlying these
           disagreements are different estimates about the projected extent
           of job losses due to offshoring, which types of jobs will be
           offshored, which areas of the economy will generate growth in job
           opportunites, and the re-employment experiences of workers whose
           jobs are offshored.

           Economic theory predicts that expansions in trade, including
           offshoring, typically should not affect the overall employment
           level (net employment) in the U.S. in the long run. Some
           economists argue that the U.S. labor market is generally expected
           to adjust quickly to changes in economic conditions because new
           jobs will be created as jobs are lost, and as a result, those who
           lose their jobs due to economic changes such as offshoring are
           expected to readily find new work. Given a flexible labor market,
           these economists theorize that the primary determinant of
           fluctuations in the employment rate is aggregate demand in the
           overall economy, observed in the business cycle.33

           Historically, the U.S. economy has rarely experienced unemployment
           rates higher than 10 percent of the labor force, with the
           exception of unique periods such as the Great Depression.34
           According to Bureau of Labor Statistics (BLS) data, since 1947,
           the civilian employment rate has increased gradually from around
           59 percent in the 1940s and 1950s, to an average of 66 percent
           over the past 20 years.35 During this period, the unemployment
           rate has generally fluctuated between about 4 percent to 8
           percent, averaging 5.6 percent per year, even though the U.S.
           labor force has grown by, on average, 1.4 million people per year.
           Furthermore, the U.S. employment rate has not been correlated with
           trade or imports. While traded goods and services have increased
           from about 4 percent of the gross domestic product (GDP) to about
           14 percent of GDP over the past 60 years, employment rates have
           steadily increased.36 Even shocks to the percentage of the economy
           that is open to trade, such as the passage of major trade
           agreements, have not been correlated with significant changes in
           employment rates. Some have argued that while balanced trade may
           not affect employment levels, large and continued trade deficits
           put American jobs at risk. Historically, however, although
           employment in certain sectors of the economy is sensitive to trade
           balances, there has been no evidence of a correlation between
           trade deficits and overall employment.37

           Although there is dispute over the number of jobs likely to be
           lost due to offshoring in years to come, even the larger estimates
           generally represent a small enough fraction of the total number of
           jobs destroyed and created in the U.S. that many believe the U.S.
           labor market is likely to be able to absorb the change. For
           example, some private sector studies estimate that between 100,000
           to 500,000 information technology jobs will be displaced over the
           next few years, and potentially several million jobs across all
           occupations could shift outside the U.S. over the next decade.38
           Several economists have pointed out that even the larger job loss
           estimates represent a relatively small percentage of the total
           number of jobs destroyed and created annually in the U.S.
           According to BLS statistics, since the end of the last recession
           in the fourth quarter of 2001, the U.S. has shed an average of
           7.64 million jobs per quarter, while creating an average of 7.77
           million jobs per quarter. Viewed in this context, some note that
           estimates of the number of jobs that could be lost due to
           offshoring do not appear to be as large of a shock to the economy.
           Moreover, some maintain that job losses due to offshoring should
           also be viewed in the context of the two-way flow of trade. Jobs
           are created as a result of U.S. firms exporting goods and services
           to other countries and foreign firms locating their production in
           the U.S. through direct foreign investment.

           Although some economists argue that trade, including offshoring,
           is unlikely to affect long-term employment rates, others have
           noted that increases in offshoring and globalization could lead to
           changes in the structure of employment, which could lead to
           changes in the number of jobs available in different occupations
           and industries and could also potentially increase unemployment.
           Structural changes to employment involve the permanent
           reallocation of workers and resources throughout the economy.39
           Offshoring could contribute to structural changes in employment by
           changing employers' demand for different skill-sets and
           occupations within certain industries. For example, offshoring
           could lead to substantial reductions in low-skilled IT-based
           services work while generating increases in high-skilled work such
           as IT systems management. It may take a long time for the economy
           to replace jobs lost to structural changes with new jobs because
           workers must switch industries, locations, or skills in order to
           find re-employment and because employers must create new jobs.40
           Although the workforce should eventually adjust to the structural
           changes in the economy, a significant structural change could
           potentially lead to an increase in unemployment in the meantime.41

           Regardless of the impact of offshoring on aggregate employment and
           the unemployment rate, many economists acknowledge that offshoring
           and increased trade could produce structural changes that could
           generate permanent shifts within the U.S. labor market. Some
           economists believe these structural changes will lead to the U.S.
           workforce gaining better jobs overall, as U.S. businesses respond
           to offshoring and globalization by creating jobs in new areas of
           specialization that capitalize on the relatively highly skilled
           workforce and abundance of capital of the U.S. economy. For
           example, some note that while the U.S. has lost significant
           numbers of computer programming jobs, potentially due to
           offshoring, the U.S. economy at the same time has experienced an
           increase in the number of more sophisticated computer-related
           occupations, such as computer software engineers.42 Other
           economists suggest that structural changes could lead to
           lower-quality jobs if the U.S. develops comparative advantage in
           areas that primarily produce low-skilled jobs.

           Research has been done on the extent to which job gains and losses
           in recent years have resulted from structural changes in the
           economy; however, this research does not indicate whether the
           structural changes were due to offshoring. For example, in their
           study of the recent U.S. labor market, Erica Groshen and Simon
           Potter found evidence of structural change following the end of
           the 2001 recession, although they did not investigate whether
           offshoring was a cause of the structural change.43

           Although many economists believe that aggregate employment will
           not be significantly affected by offshoring, there is widespread
           recognition that offshoring may nevertheless displace at least
           some workers from their jobs, leading to adjustment costs incurred
           by these workers and their families as they seek re-employment. In
           other words, although net job loss due to offshoring may be
           minimal, with losses in some industries and occupations offset by
           employment growth in other areas, gross job losses due to
           offshoring could be significant.

           Limited data make it difficult to draw conclusions about the
           current extent of job loss due to offshoring. The data limitations
           have led to conflicting claims, with some arguing that offshoring
           is a minor phenomenon and others arguing that it is being
           underestimated. For example, some cite data from the Mass Layoff
           Statistics (MLS) program produced by the Bureau of Labor
           Statistics, which showed that about 16,000 manufacturing and
           services job separations-less than 3 percent of the nonseasonal
           mass layoffs that took place in 2004-resulted from "movement of
           work" to locations outside the U.S. However, the MLS undercounts
           total job separations due to offshoring because it is designed to
           capture only mass layoffs, not total layoffs.44 In contrast,
           others cite privately collected data that suggests that the extent
           of offshoring is much greater. For example, some have cited data
           collected by Kate Bronfenbrenner and Stephanie Luce, who attempted
           to measure the extent of offshoring with data collection from
           media reports and other sources. Extrapolating from a three month
           period, they estimate that as many as 406,000 manufacturing and
           services jobs were shifted from the U.S. to other countries in
           2004.45

           Although there is considerable uncertainty about the number of
           jobs that have been lost due to offshoring, a number of economists
           expect that offshoring is likely to expand in the future, both in
           absolute numbers and in types of work. For example, Cynthia Kroll
           has estimated that nearly 15 million people, or 12 percent of the
           employed labor force, are in white-collar occupations at risk to
           offshoring, though she notes that not all jobs in these
           occupations are likely to be offshored.46 Private sector studies
           have also attempted to create forecasts of the effects of
           offshoring on employment in "at-risk" occupations; some of these
           studies project that between 100,000 and 500,000 IT jobs will be
           displaced within the next few years, and potentially several
           million jobs across all occupations will shift outside the U.S.
           over the next decade.47 However, these studies face challenges in
           estimating the effects of offshoring because they are often based
           on federal statistics that currently provide limited information
           on the level and effects of offshoring.

           Some economists have expressed concerns about the potential size
           of the dislocation costs for workers who lose their jobs due to
           offshoring, based in part on the experiences of manufacturing
           workers whose jobs were lost due to trade; others argue that the
           costs of displacement might not be as large for services workers
           as they have been for manufacturing workers. Dislocation costs
           that workers could potentially experience include lost income
           during their period of unemployment and a lifetime of reduced
           wages if they cannot find a job that pays as much as the job they
           lost. Dislocation costs could be higher if job losses are
           concentrated in geographic areas because it may be difficult for
           the regional economy to absorb so many job seekers quickly and the
           local real estate market could be impacted.48 Research on workers
           dislocated from jobs in manufacturing industries that faced import
           competition suggests that workers who lose their jobs due to
           trade-related employment changes tend to be less likely to find
           reemployment and to face larger income declines after job
           displacement than workers displaced from industries that are less
           trade-sensitive. However, some have raised questions about whether
           these results are applicable to trade-impacted services workers,
           who tend to have more desirable labor market characteristics than
           manufacturing workers. Research by J. Bradford Jensen and Lori
           Kletzer suggests that in recent years, services workers displaced
           from "tradable jobs"-jobs in industries and occupations likely to
           be affected by trade-had labor market advantages over those
           displaced from "non-tradable" service sector jobs and from
           manufacturing jobs, such as more education and higher
           predisplacement earnings.49 Re-employment rates were slightly
           higher for displaced service sector workers in tradable jobs,
           compared to those in non-tradable jobs, and were significantly
           higher than the reemployment rates for displaced manufacturing
           workers. Earnings losses were significant for displaced services
           workers in tradable jobs, however. Of those re-employed, 55
           percent experienced a decrease in earnings, with the average
           re-employed worker experiencing a 30 percent decline in earnings
           after reemployment. These large losses reflect the fact that
           displaced services workers in tradable jobs tended to have had
           relatively high wages prior to displacement.

           Underlying the debate about the effects of offshoring on
           employment and job displacement are different perspectives on the
           following questions:

           o  Will offshoring contribute to structural changes in U.S.
           employment, and how will these changes affect aggregate employment
           levels and the type of occupations available to U.S. workers?

           o  How many workers will be displaced due to offshoring?

           o  What are the reemployment experiences of workers dislocated due
           to offshoring?

           Some economists have expressed concern that offshoring could
           accelerate income inequality in the U.S.; however, others argue
           that changes in the income distribution are driven primarily by
           factors unrelated to offshoring, and still others point out that
           offshoring could potentially decrease income inequality. Those who
           think offshoring might accelerate income inequality believe it
           could do so by lowering the wages of some lower-wage and
           middle-class jobs, while potentially increasing the wages of
           smaller numbers of highly compensated positions. Those who
           disagree argue that offshoring is unlikely to have significant
           effects on wages and the U.S. income distribution because changes
           in demand for different skills are driven more by technological
           developments than by the changing international division of labor.
           Those who argue that offshoring could reduce income inequality
           note that this could occur if offshoring generates wage pressure
           on high-wage jobs, such as engineering, without significantly
           affecting the wages of low-wage jobs. Offshoring could also reduce
           income inequality if it reduces the cost of services that are
           consumed by primarily lower- and middle-income Americans.
           Underlying these disagreements are debates about whether, in the
           long run, offshoring will change the demand for U.S. workers with
           different skill levels, which sectors of the income distribution
           are most likely to be affected by this changing demand, and
           whether offshoring leads to reductions in the cost of services
           that primarily benefit lower- and middle-income Americans.

           Because offshoring is expected to have effects on the structure of
           employment within the national economy, it is expected to affect
           the distribution of income in the U.S.; however, experts hold
           differing views about the direction of these effects. Some contend
           that offshoring will increase income inequality and note several
           possible ways that it could do so. First, offshoring could
           increase income inequality if it primarily led to job losses or
           wage reductions among relatively low-income workers but had less
           of an effect on the jobs or wages of middle- and higher-income
           workers. Some offshoring observers argue that offshoring in the
           service sector has thus far primarily affected lower-wage jobs,
           such as call-center work and office support functions, rather than
           middle- or higher-income jobs. Second, some economists and policy
           analysts have expressed concern that offshoring could reduce wages
           at the middle of the income distribution and lead to a "hollowing
           out" of the middle class if it is primarily middle-income jobs
           that are moved offshore or experience wage declines. For example,
           some economists and other policy analysts have noted that
           sophisticated and well-paid job functions, such as computer
           programming and radiology analysis, are increasingly susceptible
           to offshoring. In addition, some contend that offshoring will lead
           to increased inequality by contributing to income growth among
           those at the high-end of the income distribution. For example, an
           increase in corporate profits resulting from offshoring may
           promote growth in high-wage managerial positions and income
           accruing to business owners.

           However, some economists contend that offshoring could also reduce
           income inequality if it leads to job losses or reduced wages among
           higher-wage occupations, such as engineering, without
           significantly affecting the jobs and wages of low-wage workers. In
           addition, some argue that offshoring could reduce inequality if it
           led to a decline in the wages, and consequently fees charged, by
           highly compensated workers who provide services to lower- and
           middle-income households. For example, if offshoring puts downward
           pressure on the wages of accountants, the resulting decrease in
           the cost of accounting services represents an increase in real
           wages for lower- and middle-income households who use these
           services, reducing inequality.

           Trade theory can provide a rationale for those who have noted that
           offshoring could lead to increasing income inequality. One of the
           most commonly cited models, the Heckscher-Ohlin model, predicts
           that when the U.S. initiates or expands trade with a country that
           has a dissimilar workforce, such as a developing country, this
           trade is likely to have a negative effect on the distribution of
           wage income within the U.S. workforce.50 For example, when trade
           expands between the U.S., a country with a large pool of
           highly-skilled and educated workers, and a developing country with
           a large pool of less skilled and educated workers, this model
           generally predicts that the U.S. will specialize in those goods
           and services that are best produced by more skilled and educated
           workers, while the developing country will specialize in those
           goods and services best produced by less skilled and less educated
           workers. The implication of this international specialization for
           U.S. workers is that demand for skilled workers in the U.S. will
           grow, while demand for less skilled workers in the U.S. will
           shrink. As a result, wages for more skilled and educated U.S.
           workers will increase relative to the wages of less skilled and
           educated U.S. workers, thus increasing income inequality. However,
           to the extent that services offshoring involves the movement of
           higher-skilled work to developing countries, more complex versions
           of this model generate different predictions about income
           inequality in the U.S.-income inequality could decline if the
           demand for higher-skilled workers declines relative to the demand
           for lower-skilled workers.51

           Although many economists agree that international trade, including
           offshoring, could have some impact on the distribution of income,
           some argue that these factors are not among the more important
           determinants of the U.S. income distribution. These economists
           argue that other factors are much more significant determinants of
           the changing U.S. income distribution. In particular,
           technological change is viewed by some economists as the primary
           determinant of the growing wage gap between more and less skilled
           workers. Many economists claim that as technological advances have
           occurred, particularly in computers and IT, requirements for
           technological skills for workers across a range of occupations
           have increased, requirements that often translate into increased
           demand for more educated workers. At the same time, technological
           advances have permitted some routine work to be automated,
           decreasing demand for less-skilled workers. Numerous studies have
           examined whether trade or technological change explained a larger
           share of the growing wage gap between more and less educated
           workers during the 1980s and 1990s, with the majority concluding
           that technological change was a more important determinant than
           trade.52 On balance, these studies conclude that trade has made a
           small contribution to the increase in income inequality. Estimates
           suggest that trade explains between 10 and 20 percent of the
           increase in income inequality, with the majority of the increase
           attributable to other factors such as technological change that
           favors higher-skilled workers. However, the impact of services
           offshoring on income inequality has not been examined to the same
           extent that manufacturing trade has.

           Underlying the debate about the effects of offshoring on U.S.
           income distribution are different perspectives on the following
           questions:

           o  What are the characteristics (occupation, skill level, and
           wages) of jobs that are moving offshore?

           o  What are the characteristics of jobs that are being created?

           o  Will offshoring reduce the cost of goods and services that are
           important consumption items for middle and lower income
           households?

           Experts express varying degrees of concern that offshoring could
           pose security risks, including increased risks to national
           security, critical infrastructure, and personal privacy.
           Underlying these disagreements are unresolved questions about the
           extent to which offshore operations pose additional risks than
           outsourcing services domestically and the extent to which U.S.
           laws and standards apply and are enforceable for work conducted
           offshore.

           Some security and offshoring experts, including the Department of
           Defense (DOD), have raised concerns that offshoring could pose
           increased risks to national security and critical infrastructure,
           but others believe that offshoring will not. National security
           concerns relate to government programs and systems involved in
           national defense, particularly military and intelligence
           operations. Critical infrastructure concerns relate to systems and
           structures owned by either government or private entities that are
           essential to the country, such as utilities, transportation, and
           communications networks.53

           One concern raised by security experts is that offshoring the
           development of software used in defense systems could pose
           additional security risks, specifically, that foreign workers with
           hostile intentions could obtain critical information or introduce
           malicious code into software products that could interfere with
           defense or infrastructure systems. There are currently few
           explicit restrictions on the type of services work that can be
           sent offshore.54 DOD's Defense Security Service has analyzed this
           issue and identified concerns with the potential exploitation of
           software developed in foreign research facilities and software
           companies for projects related to classified or sensitive
           programs.55 We have reviewed DOD's management of software
           developed overseas for defense weapons systems as well.56 Our
           report noted that multiple requirements and guidance acknowledge
           the inherent risks associated with foreign access to classified or
           export-controlled information and technology and are intended to
           protect U.S. national security by managing such access. However,
           we found that DOD does not require program managers of major
           weapons systems to identify or manage the potential security risks
           from foreign suppliers. For instance, DOD guidance for program
           managers to review computer code from foreign sources not directly
           controlled by DOD or its contractors is not mandatory. In
           addition, DOD programs cannot always fully identify all
           foreign-developed software in their systems.

           Private-sector groups and government officials have raised similar
           concerns about the added security risks posed by offshoring to
           U.S. non-military critical infrastructure, such as nuclear power
           plants, the electric power grid, transportation, or communications
           networks. For example, some have noted that sensitive but
           unclassified information, such as the plans of important U.S.
           utilities or transport networks, could be sent to foreign
           locations where it could be released improperly or made available
           to hostile foreign nationals. Other concerns relate to the
           offshoring of software development and maintenance. Software
           security experts in the public sector-including DOD and the
           Central Intelligence Agency-have expressed concern that
           organizations and individuals with hostile intentions, such as
           terrorist organizations and foreign government economic and
           information warfare units, could gain direct access to software
           code by infiltrating or otherwise influencing contractor and
           subcontractor staff, and then use this code to perpetrate attacks
           on U.S. infrastructure systems or conduct industrial or other
           forms of espionage. Security experts also note that critical
           infrastructure systems rely extensively on commercial off the
           shelf (COTS) software programs that are developed in locations
           around the world. These programs include exploitable
           vulnerabilities and potentially even malicious code that can allow
           indirect access to infrastructure systems to cause the systems to
           perform in unintended ways. Thus, some experts believe that
           ongoing use of COTS software modules, whether developed offshore
           or not, as well as offshoring of software-related services could
           increase the risk of unauthorized access to critical
           infrastructure code in comparison to in-house development and
           maintenance of proprietary programs and code.

           Security experts also express concerns about longer-term effects
           of offshoring. For instance, some note that continued offshoring
           of certain products might make the U.S. dependent on foreign
           operations for critical civilian or military products, and
           therefore vulnerable if relations between the U.S. and those
           countries become hostile. Another concern is the ability to
           control access to certain civilian technologies with military uses
           when work on these technologies takes place in foreign locations.
           Some fear that offshoring certain high-tech work may lead to the
           transfer of information and technology that could be used by
           foreign entities to match or counter current U.S. technical and
           military superiority. The U.S. can control exports of such
           dual-use technologies by requiring firms to obtain an export
           license from the Department of Commerce before they can be worked
           on in foreign locations or by foreign nationals. We have reviewed
           some aspects of this export licensing program and found key
           challenges to Commerce's primary mechanism for ensuring compliance
           with export licenses.57

           Some representatives of business groups contend that offshoring
           may not pose major increased security concerns for a variety of
           reasons. Some believe that protections currently in place are
           adequate to manage the added risks posed by offshoring. Currently,
           the Department of Defense has mandatory procedures to safeguard
           classified information that is released to U.S. government
           contractors, and firms that offshore certain work related to
           military technologies are required to obtain export licenses from
           either the State or Commerce departments.58 In addition, some
           argue that foreign workers in offshore locations do not
           necessarily pose added security risks, relative to U.S. workers in
           domestic outsourced operations, because domestic workers could
           also improperly handle information. Some foreign affairs experts
           also argue that offshoring could have positive effects on national
           security. They contend that increased international trade may
           reduce the threat of international tensions because countries with
           integrated economies have a stake in one another's well-being.

           Experts express varying degrees of concern about the impact
           offshoring may have on personal privacy when medical and financial
           records become accessible in overseas locations. Privacy
           advocates, academics, and offshoring researchers have noted
           concerns with the possibility that personal information sent to
           foreign locations could be improperly released, leading to
           identity theft, diversion of funds, and breaches of
           confidentiality. However, others note that the Gramm-Leach-Bliley
           Act, which covers the privacy of financial information, limits
           disclosure of personal information and requires financial
           institutions to protect the security and confidentiality of their
           customers' personal information through written agreements when
           information is sent to a third-party service provider. The privacy
           of medical information is covered under the Health Insurance
           Portability and Accountability Act Privacy Rule, which requires
           certain entities that hold medical records to receive satisfactory
           written assurance that any of their business associates will
           handle information appropriately. We are currently conducting work
           that examines offshoring of protected health information and
           related privacy issues.

           Underlying the debate about the effects of offshoring on security
           are difference perspectives on the following questions:

           o  To what extent does offshoring pose added security risks?

           o  Do existing laws, regulations, and controls provide adequate
           protection from the added risks posed by offshoring that do exist?

           Offshoring observers have proposed a broad range of policies in
           response to offshoring, representing a variety of different ideas
           about how public policies could address the concerns raised by
           offshoring. We have categorized these proposals into four types on
           the basis of concerns they seek to address: (1) improving U.S.
           global competitiveness, (2) addressing effects on the U.S.
           workforce, (3) addressing security concerns, and (4) reducing the
           extent of offshoring. Some analysts have proposed policies in more
           than one of these areas. On the other hand, it is also possible to
           take the position that services offshoring does not warrant any
           changes in government policies. While we indicate the rationales
           that have been presented for the various policy proposals, we do
           not evaluate the merits and drawbacks of these proposals. Relevant
           factors to consider in evaluating proposals would include the
           magnitude of the problems that policy proposals seek to address,
           likely effectiveness of the proposals, potential negative
           consequences, financial costs to government, and feasibility of
           administration.

           Proponents of policies that seek to improve U.S. global
           competitiveness view offshoring as one aspect of much broader
           economic and trade issues and maintain that the debate should be
           focused on issues broader than the offshoring of work by companies
           headquartered in the U.S. They contend that the appropriate focus
           should be on the broader public policy issue of how the U.S. can
           continue to compete and attract high-paying jobs in a time of
           rapidly increasing trade and open global markets that allow
           multinational firms to hire labor from around the world. These
           proponents have articulated proposals that seek to help the U.S.
           economy develop new areas of specialization in response to
           increased foreign competition by fostering the types of industries
           and businesses that can succeed in a global economy and promote
           the creation of high-value jobs. In addition, some regard these
           proposals as important for promoting U.S. economic growth,
           regardless of the offshoring debate. Many of these proposals have
           been articulated as broad policy objectives, such as "fostering
           innovation" or "improving education" rather than as specific
           policy mechanisms to achieve these objectives. Suggestions for how
           to improve U.S. global competitiveness include proposals to
           promote innovation and creative industries, improve human capital
           and the skill level of the U.S. workforce, reduce the costs of
           doing business in the U.S., and establish trade practices that
           promote U.S. exports.

           Many economists and policy analysts have predicted that for the
           U.S. economy to successfully adjust to offshoring, it will need to
           develop and produce new, innovative goods and services that
           require and reward higher levels of skill, and they believe that
           government actions can help to bring about this development. In
           addition, they point out that private companies can lack the
           incentives and time horizons to invest sufficiently in basic
           research-research undertaken without specific desired applications
           but that can lead to innovations. Some have also noted that
           federal funding for basic research has recently declined as a
           percentage of GDP and that foreign governments are increasing
           their research spending to improve their own economies' innovative
           capacity.59 Policies that have been proposed to promote innovation
           include:

           o  Increasing government support for basic research and
           development projects.

           o  Making permanent the current research and development tax
           credit to encourage companies to increase their own spending.
           Currently, the tax system allows businesses to obtain a tax credit
           for certain spending on research and development, but this credit
           requires regular reauthorization, rather than being a permanent
           feature of the tax code.60

           o  Increasing government spending on particular forms of
           infrastructure and technology that can support innovation, such as
           broadband Internet connections.

           Many who emphasize the broad goal of improving U.S.
           competitiveness also support upgrading the nation's workforce
           skills and human capital by improving education, increasing
           opportunities for worker training, and reforming immigration
           policy. They contend that for the economy to move into higher-end,
           innovative products to replace job functions that have been
           offshored, more American workers will need to develop the
           knowledge and skills to perform complex, nonroutine work. In
           particular, they emphasize the importance of education programs in
           the science, technology, engineering, and mathematics fields.61 In
           addition, some have noted that workers will increasingly need to
           upgrade their skills continually throughout their careers in order
           to adjust to rapid changes in the modern economy. As a result,
           many policies proposed in response to offshoring seek to increase
           the skill level of current and future generations of U.S. workers,
           including the following proposals:

           o  Improving K-12 education, with special attention on increasing
           achievement in math and science fields. Proponents of these
           policies argue that U.S. students demonstrate poor achievement in
           these subjects relative to students in other nations, bringing
           into question whether the U.S. will have an adequate supply of
           scientists and engineers to sustain a globally competitive and
           innovative economy.

           o  Expanding and improving lifelong learning through increased
           federal support of worker training and advanced adult education
           programs. One specific proposal is instituting "human capital tax
           credits" that could be offered either to businesses that spend
           money on worker training programs or to individuals who spend
           money on their own education. Such tax credits could partially
           offset the costs to business of training workers who may not stay
           with a company for long and the costs to workers of learning
           skills that may not guarantee long-term employment.

           o  Encouraging immigration of high-skilled workers. Proponents of
           these policies note that a large and growing segment of U.S.
           scientists and engineers are foreign-born. Specific proposals to
           increase the number of highly educated immigrants in the U.S.
           include raising the number of temporary work visas that allow
           high-skilled workers to enter the country and expediting the
           issuance of green cards for foreign graduates of U.S.
           universities.

           Other proposals to improve competitiveness focus on ways to reduce
           the costs of doing business in the U.S. relative to other
           countries. Proponents of these policies note that cost reduction
           is a leading motive for businesses to offshore service-sector work
           and that higher costs can affect the ability of U.S. firms to
           compete against foreign firms in the global economy. Proposals to
           reduce business costs in the U.S. include:

           o  Reducing federal taxes and regulatory requirements on
           businesses. Proponents of these policies argue that complex and
           high taxes and extensive regulations raise costs for companies to
           do business in the U.S. These proposals assume that taxes in
           foreign countries would remain unchanged, so that a decline in
           U.S. taxes would reduce the cost of doing business in the U.S.
           relative to the cost of doing business overseas, thus increasing
           incentives for companies to keep work in the U.S.

           o  Reducing costs to businesses of providing health care to
           employees. Proponents of these policies argue that high health
           care costs drive up the total cost of labor compensation for
           employers, although it is possible that increases in U.S. health
           care costs could be partially or fully offset by decreases in
           other components of labor compensation. Various approaches have
           been proposed to decrease health care costs, such as use of
           improved technology in the management of patient care,
           establishing association health plans that would allow small
           businesses greater leverage in negotiations with health insurance
           providers, and establishing a universal healthcare system.

           Another type of policy response to offshoring and increasing
           global interdependence focuses on expanding the market for U.S.
           exports. Proponents of these policies contend that several factors
           may be depressing U.S. exports and that more can be done to "level
           the playing field" of international trade. One concern is that
           while the U.S. has opened up its markets to foreign competition,
           some foreign governments have not opened certain of their markets,
           especially for services in which U.S. companies are globally
           competitive, such as financial services. Where trade agreements
           are in place, some have raised concerns that certain foreign
           governments may be violating them, such as by providing subsidies
           to their own industries or imposing nontariff barriers to their
           markets. A further concern that has been expressed is that some
           foreign governments may be artificially lowering the value of
           their currencies relative to the dollar so that their exports are
           relatively inexpensive, while U.S. exports become relatively more
           expensive.62 Policies that have been proposed to redress these
           concerns and enhance U.S. exports include the following:

           o  Continuing to negotiate trade agreements that will open foreign
           markets in which U.S. companies have export opportunities.

           o  Taking more aggressive actions to challenge foreign government
           actions that may violate existing trade agreements, such as
           bringing actions at the World Trade Organization (WTO) and
           imposing retaliatory measures allowed under WTO rules. Such
           violations could include foreign countries' tax incentives to U.S.
           companies that offshore or inadequate protection of intellectual
           property rights of U.S. imports, which harms the sales of U.S.
           products forced to compete with unlicensed versions.63

           o  Continuing to persuade countries that may have undervalued
           currencies to raise their currency values or to otherwise engineer
           a controlled decline in the value of the dollar.64

           Proposals to address concerns about offshoring's effects on
           workers seek to reduce the costs borne by some individuals when an
           economy becomes increasingly open to foreign trade and
           competition. Many of these proposals would provide assistance to
           workers during their period of unemployment and to help them
           obtain new jobs. While some of these proposals put particularly
           strong emphasis on retraining displaced workers, not all observers
           agree that retraining policies would be effective. Other proposals
           would expand broad social insurance programs that would cover all
           workers and provide benefits to anyone who loses a job.

           Many proposals to help workers affected by offshoring focus on
           programs designed to help workers adjust to job losses and to
           facilitate their reemployment. These include the following
           proposals:

           o  Amending the Worker Adjustment and Retraining Notification
           (WARN) Act to increase the notice that employers must give
           employees from 60 to 90 days when offshoring will cause a mass
           layoff or plant closure.65

           o  Extending the Trade Adjustment Assistance (TAA) program to
           services workers. The TAA program provides extended unemployment
           benefits and subsidized training to workers involved in the
           production of articles who can demonstrate that they were
           displaced due to increased imports or shifts in production to
           foreign countries. It generally serves workers who have been laid
           off from the manufacturing sector.66

           o  Expanding or developing income support and reemployment
           programs that would assist displaced workers in general, not just
           those who meet TAA criteria. Several policy advocates and
           researchers who have studied offshoring have stated that existing
           government programs to serve displaced workers do not provide
           adequate protections or assistance for a changing economy in which
           global trade affects more workers. For instance, they have
           questioned the effectiveness of existing worker retraining
           programs or expressed doubts that retraining will be an effective
           response as international pressures begin to affect higher-skilled
           occupations and workers who already have advanced educations.

           o  Establishing wage insurance, a program that would pay displaced
           workers who find reemployment at a lower wage a percentage of the
           difference between their previous and new earnings for a limited
           time. Proponents of wage insurance contend that it would provide
           incentives for dislocated workers to reenter the labor market
           quickly, even if they must do so at lower wages. In addition,
           proponents maintain that wage insurance could encourage workers to
           take jobs in unfamiliar fields where their inexperience commands
           lower wages, but where the job imparts new in-demand skills, and
           allow them to build new careers.67

           Some have proposed broader reforms to strengthen the social safety
           net and mitigate some of the hardships generated by the economic
           insecurity associated with an increasingly integrated global
           economy. Proponents of these policies emphasize the need to
           accompany open trade policies with enhanced social protections for
           all workers who are increasingly exposed to risks by international
           competition, such as job loss, job insecurity, or downward wage
           pressure. In addition, proponents contend that government policies
           should compensate workers who bear the costs of trade-induced
           economic disruptions. Such proposals would potentially affect
           large segments of the population and would require extensive
           rethinking and redesign of U.S. social policy, but proponents
           maintain that they could increase public acceptance of open trade
           policies. Such proposals include the following:

           o  Making health and pension benefits portable and/or universal so
           that workers who lose their jobs can retain their access to
           medical care and retirement plans. Some favor the government's
           providing universal health care coverage, and others propose
           preserving or expanding portable or universal retirement coverage.

           o  Requiring employers that move jobs offshore to pay some of the
           costs for worker assistance programs. Proponents contend that
           government should play a role in redistributing some of the gains
           from offshoring to workers who have been negatively affected.
           Proponents believe that such proposals would serve this principle
           and could mitigate some concerns about offshoring's effects on
           income inequality.

           Proposals to address concerns about security seek to reduce the
           added risk that information sent to foreign locations could be
           used in ways that could impair U.S. national security, critical
           infrastructure, or personal privacy. Proposals include
           restrictions on certain types of work with security implications
           and strengthening standards governing how information is handled.

           Concerns that offshoring could pose increased risks to national
           security or critical infrastructure have led to proposals to
           restrict some services work from being sent to foreign locations
           or performed by foreign nationals and to improve security
           standards for work that is performed offshore, including the
           following proposals:

           o  Requiring that certain projects involving defense acquisitions
           or military equipment be performed exclusively in the U.S.

           o  Requiring that work on critical infrastructure projects such as
           electricity grids or pipelines be done within the U.S.

           o  Increasing the standards and review procedures that apply to
           use of offshore services. For example, GAO has previously
           recommended that DOD adopt more effective practices for developing
           software and increasing oversight of software-intensive systems,
           such as ensuring that risk assessments of weapons programs
           consider threats to software development from foreign suppliers.68

           Concerns that offshoring could pose added risks to the privacy of
           personal information have led to a variety of proposals to enhance
           protections, including the following:

           o  Requiring companies to keep work involving sensitive private
           information in the U.S.

           o  Requiring companies to notify and obtain consent from U.S.
           residents before sending personal information to be processed in
           other countries.

           o  Ensuring that consumers have legal recourse against U.S. firms
           for privacy breaches by foreign contractors.

           o  Strengthening U.S. laws and regulations concerning the handling
           of personal information, regardless of whether the data are
           handled domestically or overseas. Those who propose this option
           contend that U.S. laws and regulations do not provide adequate
           protections for personal information in general, regardless of
           where the information is handled.

           Another type of policy that has been proposed to address the
           various concerns raised by offshoring focuses on reducing the
           extent of offshoring. Some of these policy proposals focus on
           offshoring by government agencies, while others seek to modify
           firms' incentives with respect to where they source their work.

           There have been numerous proposals to limit or constrain
           offshoring by federal and state governments, including the
           following examples:69

           o  Legislation proposed to prohibit federal work or federally
           funded work from being performed in foreign countries, unless the
           foreign goods or services are for use in that country.

           o  Legislation proposed to require contractors with the U.S.
           military and executive agencies to have at least 50 percent of
           their workforce in the U.S.

           o  Legislation proposed to prohibit the federal government from
           providing assistance to, or doing business with, companies that in
           the last 5 years offshored jobs previously performed in the U.S.,
           unless the company also creates significant replacement jobs in
           the U.S.

           o  Legislation proposed in several states to restrict the
           procurement of state-funded services from overseas.

           o  Proposals to prohibit government contracts from going to
           countries that have not signed trade agreements with the U.S. on
           non-discrimination in government procurement.

           Another proposed means of reducing offshoring is to change tax
           policy to alter the relative costs of domestic versus foreign
           production. Many economists and policy analysts believe the
           current tax system provides incentives for U.S. multinational
           firms to locate work at their overseas affiliates because it
           allows them to defer taxes on profits earned on some activities in
           foreign countries until the profits are brought back to the U.S.
           However, some note that this tax treatment helps U.S.-owned
           businesses compete in foreign markets against foreign-owned
           businesses.70 Proposals for changing the tax code include:

           o  Eliminating the ability of firms to defer foreign-earned income
           by taxing foreign profits at the same rate as domestic profits in
           the year they are earned. This proposal would affect only
           offshoring that takes place between U.S.-based multinational firms
           and their foreign affiliates. It would not affect offshoring that
           involves outsourcing work to separate firms located overseas.

           o  Establishing a value-added tax (VAT) system, in which a tax
           could be applied to products imported to the U.S. and rebated on
           products the U.S. exports. However, as GAO and others have
           reported, many economists believe that such border tax adjustments
           would not affect the trade balance in the long run because
           exchange rates would adjust to offset the border adjustments.71

           Other policy proposals would enhance incentives for firms to
           locate work domestically. Proponents of these policies note that
           foreign governments award incentives, such as providing buildings,
           infrastructure, and tax exemptions, to companies that export
           service products. In response, some suggest that the U.S. provide
           similar incentives, including the following proposals:

           o  Providing tax reductions or subsidies to companies that employ
           domestic workers. One specific proposal is a tax credit for
           companies in certain industries identified as affected by
           offshoring that would cover the payroll taxes of newly hired
           employees.

           o  Providing federal assistance for regional economic development
           plans, including infrastructure improvements and grants targeted
           at attracting work that might otherwise be offshored.

           Determining appropriate policy responses to the offshoring
           phenomenon is challenging for several reasons. Services offshoring
           is a relatively recent phenomenon that raises a broad range of
           issues. No federal data series directly measure the extent of
           offshoring or its effects. Moreover, experts have expressed
           differing views about the potential impacts of offshoring.
           Nevertheless, there are some key areas where further research
           might help to provide more information about the impacts and
           policy implications of services offshoring. These areas include

           o  impacts of offshoring on various sectors of the U.S. economy,
           and especially the sectors that are emerging as new sources of
           comparative advantage;

           o  impacts of offshoring on the workforce, such as numbers of
           workers displaced and their reemployment experiences;

           o  impacts of offshoring on the U.S. income distribution,
           including trends in wage levels of jobs moving offshore; and

           o  any increased security-related risks posed by offshoring and
           the extent to which these are mitigated by current practices and
           laws.

           Further research in these areas could help inform policy making by
           providing more information about the nature and magnitude of the
           benefits and costs resulting from offshoring. For example,
           research on whether offshoring is negatively impacting important
           sectors of the economy could help to inform the need for new
           policies to enhance U.S. competitiveness. Further information on
           the number of job losses resulting from offshoring as well as how
           workers fare in the labor market after their dislocations could
           help inform the need for new policies to assist displaced workers
           and to target these policies appropriately. Research on how
           offshoring is affecting the distribution of income in the U.S.
           could help to inform policy makers whether new policies are needed
           to address income inequality. Research that examines whether
           offshoring increases risks to national security, critical
           infrastructure, and consumer privacy can help to inform policy
           makers whether there is a need for additional security
           protections. Finally, research in all of these areas may help to
           advance the debate about whether policies to reduce the extent of
           offshoring are warranted.

           Researchers are conducting studies that can shed light on some of
           these areas. For example, some researchers have conducted case
           studies that examine the effects of offshoring in the
           semiconductor, call center, and radiology industries.72 Among
           other issues, these studies examined the types of work that are
           conducted offshore and the types of work that are conducted in the
           U.S. In their study of the radiology industry, for instance, Frank
           Levy and Ari Goelman conclude that radiology work conducted
           overseas is unlikely to displace radiology work done in the U.S.,
           noting that offshore work primarily consists of preliminary
           readings of radiological images conducted at night when few
           radiologists in the U.S. would be available. However, the
           radiology industry may not be comparable with other industries in
           which offshoring takes place. Other researchers have utilized
           statistical methods for analyzing existing data series. For
           example, Martin Baily and Robert Lawrence have used a variety of
           methods to analyze trade and employment data and examine
           offshoring's effects on unemployment.73 In some instances,
           researchers may be able to apply statistical methods that were
           utilized in research on offshoring and trade in the manufacturing
           sector to conduct research on services offshoring.

           There may also be opportunities to expand or improve current
           federal data series to obtain more information on this topic. For
           example, some have raised concerns that there is a significant
           discrepancy between data on the levels of services imports from
           India as reported by U.S. federal government sources and the data
           reported by India. In a review of BEA and Indian services data, we
           identified several factors that contributed to this discrepancy,
           such as differences in each country's definitions of trade in
           services. We also recommended ways in which BEA can further
           improve its services trade data.74 Other examples of limitations
           of current databases identified by offshoring researchers are that
           data on services trade are not available at a sufficiently
           detailed industry level, trade data may not capture services that
           are bundled with goods or other services, and data on foreign
           affiliates of multinational corporations lack information on
           occupations of workers employed overseas.75

           Table 1 illustrates some key areas where further research might
           contribute to a better understanding of the effects and policy
           implications of offshoring. The table identifies some pertinent
           data sources, though none of the sources can directly answer the
           research questions. Generally speaking, these data sources can
           provide information on a phenomenon, such as changes in employment
           in a given occupation or changes in the output produced by an
           industry, but they cannot provide information on the extent to
           which these changes resulted from offshoring. For example, BLS
           collects data on employment levels in various industries and
           occupations, but the data capture job losses and gains that occur
           for all reasons, not only because of offshoring. Table 1 also
           identifies some of the methodological approaches that have been,
           or could be, used in these areas of research. These include
           conducting in-depth studies of firms and industries and using
           statistical methods for analyzing existing data. Table 1 also
           highlights some potential challenges and limitations of the
           various approaches. For example, while in-depth studies of
           services offshoring in particular industries may shed light on
           some dynamics of the offshoring phenomenon, their findings are not
           necessarily reflective of what is occurring nationally. Our
           overview of research questions, data sources, research methods,
           and limitations is not meant to be exhaustive. Researchers will
           continue to pose new questions and approaches to gain further
           insights into offshoring.

                                   Background

Defining Offshoring

Types of Services Associated with Offshoring

2For more information about the definition of offshoring, see appendix II
of GAO-04-932 .

U.S. Trade and Foreign Direct Investment

3Goods-producing industries may also employ workers in "services"
occupations (e.g., computer programmers at a computer manufacturer or
accountants at an automobile company).

4See GAO-04-932 .

5These numbers have not been adjusted for inflation.

6The World Trade Organization defines commercial services as services (as
defined by the International Monetary Fund and Commerce Department's
Bureau of Economic Analysis) less government services.

Enabling Factors and Incentives for Offshoring

7BEA's country-level foreign-direct investment data is valued on a
historical cost basis.

8These numbers refer to employment by majority-owned nonbank U.S.
affiliates of foreign multinational corporations.

9Rafiq Dossani and Martin Kenney, "Went for Cost, Stayed for Quality?
Moving the Back Office to India," Berkeley Roundtable on the International
Economy Paper. BRIEWP156 (Berkeley, Calif.: University of California,
Berkeley, 2003).

10Forrester Research, Inc., Offshore Outsourcing: The Complete Guide
(Sept. 7, 2004); Booz Allen Hamilton, Business Process Offshoring: Making
the Right Decision (December 2003); The Boston Consulting Group, Capturing
Global Advantage: How Leading Industrial Companies Are Transforming Their
Industries by Sourcing and Selling in China, India, and Other Low-Cost
Countries (April 2004).

Legislation Enacted in Response to Trade-Related Concerns

11Deloitte Touche Tohmatsu, Making the Off-Shore Call: The Road Map for
Communications Operators (2004); Nirupam Bajpai, Jeffrey Sachs, Rohit
Arora, and Harpreet Khurana, "Global Services Sourcing: Issues of Cost and
Quality," CSGD Working Paper 16 (New York, N.Y.: The Earth Institute at
Columbia University, June 2004). However, some experts note that although
wages are rising in some developing countries, the wage differential
between the U.S. and developing countries is likely to remain sizable for
some time to come. In addition, as wages rise in some developing
countries, firms could turn to other countries where labor costs remain
low.

12These include the Trade Expansion Act of 1962 (Pub. L. No. 87-794),
Trade Act of 1974 (Pub. L. No. 93-618), Trade Agreements Act of 1979 (Pub.
L. No. 96-39), Export Administration Act (Pub. L. No. 96-72),
Stevenson-Wydler Technology Innovation Act of 1980 (Pub. L. No. 96-480),
Omnibus Trade and Competitiveness Act of 1988 (Pub. L. No. 100-418); and
the Trade Act of 2002 (Pub. L. No. 107-210).

13Pub. L. No. 98-573; 19 U.S.C. S: 2114b.

14Pub. L. No. 105-220; 29 U.S.C. S: 2801.

  While Traditional Economic Theory Predicts That Offshoring Will Benefit the
Overall Economy, Concerns Have Been Raised about Four Areas of Potential Impact

Potential Impacts on the Average U.S. Standard of Living

  Traditional Economic Theory Predicts that Offshoring Will Benefit Average U.S.
  Living Standards in the Long Run

15Productivity is a measure of the efficiency with which an economy uses
its resources, often defined as increases in output per hour worked, and
economists believe that productivity is key to long-term per-capita income
and real wage growth. Labor productivity is defined as output per hour of
labor worked and depends on (1) the skills (or "quality") of the
workforce, (2) the amount and quality of the technology available to the
workforce, and (3) additional factors such as the efficacy of management.
Labor productivity is the most commonly used productivity measure. This
measure is convenient for researchers because the Bureau of Labor
Statistics (BLS) produces quarterly measures of labor productivity. A
broader productivity measure that is sometimes used is multifactor
productivity (MFP), also known as total factor productivity (TFP). The BLS
produces two sets of MFP indexes. One multifactor productivity index,
produced by the Major Sector Multifactor Productivity program, is produced
for major sectors of the U.S. economy (private business and private
non-farm business), the manufacturing sector in aggregate, and 20 2-digit
Standard Industrial Classification (SIC) manufacturing industries and the
utility and gas industries. The multifactor productivity indexes for the
private business and private nonfarm business sectors measure output per
combined unit of labor and capital input, while the multifactor
productivity indexes for total manufacturing and for the 2-digit SIC
manufacturing industries provide measures of sector output per combined
unit of capital (K), labor (L), energy (E), materials (M), and purchased
business services (S) inputs-called KLEMS inputs. A second multifactor
productivity index, produced by the Industry Multifactor Productivity
Program, is produced for 140 3-digit SIC manufacturing industries and the
railroad transportation industry. The industry multifactor productivity
measures are constructed in a manner similar to the manufacturing sector
series. The sector multifactor productivity measures and the KLEMS
multifactor productivity measures are available annually.

16IT-enabled services are broader than IT services. IT-enabled services
are those services that have been transformed by information and
communications technology, enabling them to be digitized, codified, and
fragmented and therefore able to be undertaken at any distance from the
core business and final customer. These services include those often
associated with offshoring, including accounting, financial analysis,
call-center services, architectural drafting, and health-record
transcription, among other services activities. See Catherine L. Mann,
"Offshore Outsourcing and the Globalization of U.S. Services: Why Now, How
Important, and What Policy Implications," The United States and the World
Economy: Foreign Economic Policy for the Next Decade, ed. C. Fred Bergsten
and the Institute for International Economics (Washington, D.C.: Institute
for International Economics, January 2005), 281-312.

17Catherine L. Mann, "Globalization of IT Services and White Collar Jobs:
The Next Wave of Productivity Growth," International Economics Policy
Briefs PB03-11 (Washington, D.C.: Institute for International Economics,
December 2003). This paper has also received criticism for its
methodology. See L. Josh Bivens, "Truth and Consequences of Offshoring:
Recent Studies Overstate the Benefits and Ignore the Costs to American
Workers," Briefing Paper #155 (Washington, D.C.: Economic Policy
Institute, Aug. 2, 2005).

18For a summary of this literature, including references to both case
studies and analyses based on aggregate data and industry and firm level
data, see Kevin Stiroh, "Information Technology and the US Productivity
Revival: A Review of the Evidence," Business Economics 37:1 (January
2002), 30-37. See also Erik Brynjolfsson and Lorin Hitt. "Beyond
Computation: Information Technology, Organizational Transformation and
Business Performance," Journal of Economic Perspectives 14:4 (fall 2000):
23-48.

19A country is said to have a comparative advantage in the production of a
good or service if it can produce that good or service at a lower
opportunity cost than another country. The opportunity cost of producing a
particular good or service, say cloth, is defined as the amount of
production of other goods and services that must be given up in order to
produce one more unit of cloth. This concept should be distinguished from
absolute advantage, which reflects the quantity of productive resources
that must be used, rather than what other goods or services must be given
up by using those productive resources to make cloth.

20Some economists have also argued that in the long-term as the economies
of low-wage trading partners grow, the U.S. will benefit from the
emergence of intra-industry trade with such trading partners. For example,
see Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan, "The Muddles
Over Outsourcing," Journal of Economic Perspectives 18:4 (Fall 2004):
93-114. Intra-industry trade occurs when a country imports and exports
goods in the same industry (for example, passenger cars are exported and
imported by both the U.S and Germany). In intra-industry trade, countries
still benefit from trade, as the larger market created by trade permits
economies of scale and consequent product differentiation. See also Roy J.
Ruffin, "The Nature and Significance of Intra-Industry Trade," Economic
and Financial Review (Dallas, Tex.: Federal Reserve Bank of Dallas, fourth
quarter 1999).

21Clair Brown and Greg Linden, "Offshoring in the Semiconductor Industry:
A Historical Perspective," Berkeley-Doshisha Employment and Technology
Working Paper cwts-02-2005 (Berkeley, Calif.: University of California,
Berkeley, 2005).

22J. Bradford Jensen and Lori G. Kletzer, "Tradable Services:
Understanding the Scope and Impact of Services Offshoring" (July 14, 2005,
forthcoming in Brookings Trade Forum, 2005: Offshoring White-Collar
Work-The Issues and the Implications, Lael Brainard and Susan M. Collins,
ed.).

23There is some consensus in the literature that openness to trade is
positively correlated with economic growth. For a survey of this
literature, see Andrew Berg and Anne Krueger, "Trade, Growth and Poverty:
A Selective Survey," IMF Working Paper WP/03/30 (Washington, D.C.:
International Monetary Fund, February 2003). However, there is also some
disagreement. For an opposing view, see Francisco Rodriguez and Dani
Rodrik, "Trade Policy and Economic Growth: A Skeptic's Guide to the
Cross-National Evidence," NBER Working Paper 7081 (Cambridge, Mass.:
National Bureau of Economic Research, April 1999). Robert Baldwin also
reviews this literature in "Openness and Growth: What's the Empirical
Relationship?" NBER Working Paper 9578 (Cambridge, Mass.: National Bureau
of Economic Research, March 2003).

24Proprietor's income is the income of noncorporate businesses. It is
difficult to attribute to labor or capital. Some percentage of
proprietor's income may be considered a wage paid by the business owner to
themselves for their own labor, while some percentage may be considered a
return on capital investment.

  Some Economists Have Argued That Offshoring Could Negatively Impact U.S.
  Living Standards

25It should be noted that it is not always straightforward to determine
the extent to which price declines can be attributed to the effects of
trade. In part, this is because most traded products are manufactures and
are generally subject to greater productivity growth (and hence steeper
declines in costs) than nontraded products such as some services.

26A summary of trade models and their applicability to services offshoring
can be found in James R. Markusen, "Modeling the Offshoring of
White-Collar Services: From Comparative Advantage to the New Theories of
Trade and FDI," (paper prepared for the  Brookings Trade Forum 2005,
Offshoring White-Collar Work: The Issues and the Implications, Washington,
D.C., May 12-13, 2005).

27Ralph E. Gomory and William J. Baumol, Global Trade and Conflicting
National Interests (Cambridge, Mass.: Massachusetts Institute of
Technology, 2000).

28In other scenarios in Baumol and Gomory's model, the U.S. loses its
relative position in the global economy as trading partners start to catch
up with U.S. living standards, although in absolute terms productivity
improvements abroad are beneficial for the U.S. standard of living. In
general the detrimental impact on the U.S. predicted by these models does
not result specifically from services offshoring but from any developments
abroad that lead to foreign firms competing successfully with U.S.
exports.

29Another paper that presents a theoretical example of this situation is
Paul A. Samuelson, "Where Ricardo and Mill Rebut and Confirm Arguments of
Mainstream Economists Supporting Globalization," Journal of Economic
Perspectives, 18:3 (summer 2004): 135-146. See also Markusen, which
summarizes several trade models in which productivity changes abroad lead
to losses in the absolute or relative position of the U.S. in the global
economy.

30See, for example, Ron Hira's testimony before the U.S. House Committee
on Small Business, The Globalization of White-Collar Jobs: Can America
Lose These Jobs and Still Prosper? 108th Congress (June 18, 2003).

31For example, see Economic Policy Institute, "Offshoring," EPI Issue
Guide, www.epinet.org (June 2004, accessed on July 12, 2005).

32For example, see Bivens.

Potential Impacts on Employment and Job Displacement

  Many Economists Expect Offshoring to Have Little Effect on Long-Run Aggregate
  Employment, but Expect It to Have Effects on the Structure of Employment

33Aggregate demand is the overall demand for output in the economy and
reflects consumer and government spending as well as investment demand and
net exports. These in turn are dependent on income, interest rates,
investor and consumer confidence, and fiscal and monetary policy, among
other things. It is thought that monetary policy, set by the Federal
Reserve, can be used to stimulate aggregate demand during recessions so
that the economy remains close to full employment. According to this view,
while deviations from full-employment will occur in the short-run, in the
long-run monetary policy can stabilize employment around the
full-employment level.

34The unemployment rate (or civilian unemployment rate) is the number of
U.S. civilians aged 16 and over who are in the labor force but not
employed, divided by the number of U.S. civilians aged 16 and over who are
in the labor force. The denominator excludes persons not in the labor
market (those under 16; those not employed but not looking for work).

35The civilian employment rate (or employment to population ratio) is the
number of U.S. civilians aged 16 and over who are employed, divided by the
total number of civilians aged 16 and over in the population. The
denominator includes persons not in the labor market (those not employed
but not looking for work).

36Congressional Research Service, Job Losses: Causes and Policy
Implications, RL32194 (Washington, D.C.: Dec. 22, 2004).

37Standard economic analysis predicts that trade deficits are not expected
to generate unemployment. When the U.S. sustains a trade deficit, the U.S.
is consuming goods and services of greater value than its GDP. This in
turn means that other countries are necessarily supplying a net inflow of
capital to the U.S., which permits the U.S. to pay for imports that exceed
the value of its exports. The net capital inflow from foreign countries
that accompanies a trade deficit is used in economic activities that
generate jobs, such as direct investment in U.S. companies, or purchases
of U.S. treasury debt which keeps U.S. interest rates low and thus
stimulates domestic investment. The jobs generated by this net capital
inflow should in theory offset the jobs that are lost when export
industries decline. The BEA publishes a measure "Gross Domestic Purchases"
that matches U.S. consumption of goods and services and can be compared to
Gross Domestic Product.

38See GAO-04-932 .

39Erica L. Groshen and Simon Potter, "Has Structural Change Contributed to
a Jobless Recovery?" Current Issues in Economics and Finance 9:8 (New
York, N.Y.: Federal Reserve Bank of New York, August 2003).

40Cyclical job loss, in which jobs are temporarily suspended due to
short-term declines in demand, leads to ready re-employment of laid-off
workers in the same industry (and often the same job) when demand
increases.

41Michael Klein, Scott Schuh and Robert Triest, "Job Creation, Job
Destruction, and International Competition: A Literature Review," Federal
Reserve Bank of Boston Working Paper 02-7 (Boston, Mass.: Federal Reserve
Bank of Boston, December 2002) citing Carl Davidson, Lawrence Martin, and
Steven Matusz, "Trade and Search Generated Unemployment," Journal of
International Economics 48:2 (1999): 271-299.

42Martin Neil Baily and Robert Z. Lawrence, "What Happened to the Great
U.S. Job Machine? The Role of Trade and Electronic Offshoring," Brookings
Papers on Economic Activity 2 (2004): 211-284.

  There is Widespread Recognition That Offshoring Will Cause Some Job
  Displacement but Considerable Disagreement about the Expected Magnitude of
  This Problem

43See Groshen and Potter.

44The MLS program does not collect statistics from small
establishments-those employing fewer than 50 workers. In establishments
employing 50 or more workers, MLS does not collect statistics on layoffs
of less than 50 workers in a 5-week period. As a result, it collects data
on only a portion of total layoffs. GAO previously reported that in 2003,
the MLS survey covered only 4.6 percent of all U.S. establishments and
56.7 percent of all U.S. workers. In addition, MLS data is collected by
employer self-report, and some employers may be unwilling to provide
information when interviewed about reasons for layoffs. See GAO-04-932 .

45By searching media sources for evidence of job shifts from the U.S. to
other countries and corroborating the information with company records,
Kate Bronfenbrenner and Stephanie Luce identified 48,417 job losses due to
offshoring that occurred between January and March 2004. The authors
believe that this methodology underestimates the number of job losses from
offshoring because media reports do not capture all job losses. On the
assumption that media reports capture two-thirds of job shifts to Mexico
and one-third of shifts to other countries, the authors estimate that as
many as 406,000 jobs were shifted overseas in 2004. See Kate
Bronfenbrenner and Stephanie Luce, The Changing Nature of Corporate Global
Restructuring: The Impact of Production Shifts on Jobs in the U.S., China,
and around the Globe, paper submitted to the U.S.-China Economic and
Security Review Commission (Oct. 14, 2004). We did not assess the
reliability of this or other studies that estimate the magnitude of job
losses due to offshoring (see app. I).

46Cynthia Kroll, "State and Metropolitan Area Impacts of the Offshore
Outsourcing of Business Services and IT," Fisher Center Working Paper 293
(Berkeley, Calif.: University of California, Berkeley, Fisher Center for
Real Estate & Urban Economics, 2005).

47These studies are summarized in GAO-04-932 .

48See Kroll for a discussion of potential impacts of services offshoring
on state and metropolitan areas.

49See Jensen and Kletzer.

Potential Impacts on the Distribution of Income

  Some Economists Expect That Offshoring Could Affect the Distribution of Wage
  Income among U.S. Workers

50The Heckscher-Ohlin (HO) model explicitly models the wage rate received
by different factors of production in each trading partner. Different
factors of production may refer to workers of different skill levels, such
as college-educated versus high school-educated workers, or the model can
be used to examine the impact of trade on the income earned by owners of
capital compared to wage earners. An argument similar to that which
explains increased income inequality between workers of different skill
levels can explain why increased trade with a developing country is likely
to increase the return to capital (i.e., corporate profits) relative to
wage income in the U.S. A developing country is likely to have a larger
workforce relative to the amount of capital stock (financial resources and
physical capital) than the U.S. Therefore, simple trade theory models
predict that as trade between the U.S. and a developing country increases,
the developing country will specialize in goods and services that are more
labor intensive, while the U.S. will specialize in goods and services that
are more capital-intensive. These patterns of specialization imply that in
the U.S., corporate profits as a share of national income may rise, while
employee compensation as a share of national income may fall, as demand
for capital in the U.S. grows.

51See Markusen. In addition, if the developing country does begin to
compete in areas that employ higher-skilled and higher-paid U.S. workers,
the factor-price equalization theorem predicts that income inequality in
the U.S. would decline, due to falling relative wages among higher-skilled
U.S. workers. A further caveat to the prediction that trade with a
developing country is likely to increase income inequality in the U.S.
that some economists have discussed is the potential for the emergence of
intra-industry trade with developing country trading partners. These
economists have argued that over time, as the economies of developing
countries grow and become more similar to developed countries' economies,
all trading partners will benefit from the emergence of intra-industry
trade, where a country imports and exports goods in the same industry.
Because intra-industry trade is not based on scarce and abundant factors
of production, it is not expected to lead to large changes in the
distribution of income within each country.

52A summary of this literature is provided in Congressional Research
Service, Foreign Outsourcing: Economic Implications and Policy Responses,
RL32484 (Washington, D.C.: June 21, 2005).

Potential Impacts on Security

  Some Concerns Have Been Raised That Offshoring May Pose Increased Risks to
  National Security and Critical Infrastructure, Though Some Experts Contend
  That Offshoring May Not Pose Additional Major Risks

53Presidential Decision Directive/NSC-63 on Critical Infrastructure
Protection defines critical infrastructure as "those physical and
cyber-based systems essential to the minimum operations of the economy and
government. They include, but are not limited to, telecommunications,
energy, banking and finance, transportation, water systems, and emergency
systems, both governmental and private."

54There are some restrictions in annual defense appropriations and
authorization acts requiring certain DOD procurements to be performed by
U.S. firms, for instance research contracts in connection with weapons
systems and the Ballistic Missile Defense Program. See GAO, Federal
Procurement: International Agreements Result in Waivers of Some U.S.
Domestic Source Restrictions, GAO-05-188 (Washington, D.C.: Jan. 26,
2005); also Defense Federal Acquisition Regulation Supplement, Subpart
225.70.

55Defense Security Service, Technology Collection Trends in the U.S.
Defense Industry 2002 (Alexandria, Va.: 2002).

56GAO, Defense Acquisitions: Knowledge of Software Suppliers Needed to
Manage Risks, GAO-04-678 (Washington, D.C.: May 25, 2004).

57GAO, Export Controls: Post-Shipment Verification Provides Limited
Assurance That Dual-Use Items Are Being Properly Used, GAO-04-357
(Washington, D.C.: Jan. 12, 2004). This GAO review did not look at
controls over service inputs specifically but found weaknesses in
Commerce's post-shipment verification checks for confirming that
controlled items sent to countries of concern arrive at their proper
location and are used in compliance with the conditions of export
licenses.

58The State Department manages the regulation of defense articles and
services, while the Commerce Department manages the regulation of dual-use
items with both military and commercial applications. In most cases,
Commerce's controls are less restrictive than State's. GAO has reviewed
this export-control system, and found that Commerce has improperly
classified some State-controlled items. See GAO, Export Controls:
Processes for Determining Proper Control of Defense-Related Items Need
Improvement, GAO-02-996 (Washington, D.C.: Sept. 20, 2002).

  Concerns Have Been Raised about the Impact of Offshoring on Personal Privacy

     A Wide Range of Policies Have Been Proposed to Address Concerns about
                         Offshoring's Potential Impacts

Proposals to Improve the Competitiveness of the US Economy

  Promoting Innovation

  Improving Workforce Skills

59The Congressional Research Service reports that the intensity of
government-funded basic research has fallen from about 0.7% of GDP in 1953
to about 0.2% of GDP in 2002. See Congressional Research Service, RL
32484.

60In a review of the research and development tax credit, GAO concluded
that the credit's net benefits to society are uncertain. Private sector
studies concluded that during the 1980's each dollar of foregone tax
revenue due to the credit resulted in a dollar of spending on research,
but we raised questions about the methodologies of these studies. In
addition, these studies did not examine the benefits gained by society
from research stimulated by these credits or the costs to society from the
collection of taxes required to fund the credits. See GAO, Tax Policy and
Administration: Review of Studies of the Effectiveness of the Research Tax
Credit, GAO/GGD-96-43 (Washington, D.C.: May 21, 1996).

  Reducing Business Costs

61GAO recently examined federally-funded higher education programs in
these fields. See GAO, Higher Education: Federal Science, Technology,
Engineering, and Mathematics Programs and Related Trends, GAO-06-114
(Washington, D.C.: Oct. 12, 2005).

  Enhancing U.S. Exports

62The Department of the Treasury is required to assess annually whether
foreign countries are manipulating their currencies for trade advantage.
GAO examined the Treasury's process for making these assessments and
reported that Treasury has not found that either China or Japan meet all
legal criteria for currency manipulation. However, GAO also noted that
many experts have concluded that China's currency is undervalued, though
by widely varying amounts, and some maintain that undervaluation cannot be
determined. See GAO, International Trade: Treasury Assessments Have Not
Found Currency Manipulation, but Concerns about Exchange Rates Continue,
GAO-05-351 (Washington, D.C.: Apr. 19, 2005).

63GAO has previously found that the U.S. government lacks a coordinated
strategy to handle the growing workload involved in monitoring and
enforcing trade agreements. See GAO, International Trade: Further
Improvements Needed to Handle Growing Workload for Monitoring and
Enforcing Trade Agreements, GAO-05-537 (Washington D.C.: June 30, 2005).
More specifically, GAO has found limitations in the World Trade
Organization's (WTO) intended mechanism to review China's compliance with
its trade commitments and made recommendations for key agencies to improve
their management of China's WTO compliance. See GAO, U.S.-China Trade:
Observations on Ensuring China's Compliance with World Trade Organization
Commitments, GAO-05-295T (Washington D.C.: Feb. 4, 2005).

64In a previous study, GAO concluded that a revaluation of the Chinese
renminbi would have implications for various aspects of the U.S.
economy-with both costs and benefits-although the impacts are hard to
predict. See GAO-05-351 .

Proposals to Assist Workers Affected by Offshoring

  Assisting Displaced Workers in Transition to New Employment

65Pub. L. No. 100-379; 29 U.S.C. S: 2101-2109.

66Pub. L. No. 93-618; 19 U.S.C. S: 2271.

  Broader Reforms of Social Insurance Programs

67The Trade Act of 2002 that reformed the TAA program created a
demonstration wage insurance benefit for workers 50 years of age and over
in the TAA program who meet a series of criteria. Pub. L. No 107-210 S:
124; 19 U.S.C. S: 2318.

Proposals to Protect Security

  Protecting National Security and Critical Infrastructure

  Protecting Personal Privacy

68See GAO-04-678 .

Proposals to Reduce the Extent of Offshoring

  Restricting Offshoring by Government Agencies

69We are examining the occurrence and nature of services offshoring in
several government human services programs and the extent to which legal
restrictions limit the ability to procure services from foreign locations.
We have also examined impacts of legislation restraining imports. See, for
example, GAO, Maritime Issues: Assessment of the International Trade
Commission's 1995 Analysis of the Economic Impact of the Jones Act,
B-279386 (Washington, D.C.: Mar. 6, 1998). This study examined legislation
requiring that, with few exceptions, cargo transported by water between
points in the U.S. be carried on U.S.-built, -registered, -owned, and
-crewed ships.

  Modifying the U.S. Tax Code to Reduce Incentives for Offshoring

  Providing Incentives for Businesses to Locate Work in the U.S.

70Many countries do not tax the foreign-source income of their resident
corporations. Consequently, in the absence of deferral, these
foreign-based corporations would often have an advantage when competing
against U.S.-owned subsidiaries operating in a third country.

71GAO, Tax Administration: Potential Impact of Alternative Taxes on
Taxpayers and Administrators, GAO/GGD-98-37 (Washington, D.C.: Jan. 14,
1998); Congressional Research Service, The Flat Tax, Value-Added Tax, and
National Retail Sales Tax: Overview of the Issues, RL32603 (Washington,
D.C.: Dec. 14, 2004).

    Additional Research in Key Areas May Help Advance the Offshoring Debate

72Rosemary Batt, Virginia Doellgast, and Hyunji Kwon, "A Comparison of
Service Management and Employment Systems in U.S. and Indian Call Centers"
and Frank Levy and Ari Goelman, "Offshoring and Radiology," (prepared for
the Brookings Trade Forum 2005: Offshoring White-Collar Work-The Issues
and the Implications, Washington, D.C., May 12-13, 2005); Clair Brown and
Greg Linden, "Offshoring in the Semiconductor Industry: A Historical
Perspective," Berkeley-Doshisha Employment and Technology Working Paper
Series cwts-02-2005 (Berkeley, Calif.: University of California, Berkeley,
2005).

73Martin Baily and Robert Lawrence use data from U.S. and Indian trade
statistics, as well as additional sources, to estimate the number of jobs
lost due to offshoring in both the manufacturing and services sector
between 2000 and 2003. Their results suggest that offshoring did not cause
large enough job dislocations to be a significant source of unemployment
in either services or manufacturing. See Martin Neil Baily and Robert Z.
Lawrence, "What Happened to the Great U.S. Job Machine? The Role of Trade
and Electronic Offshoring," Brookings Papers on Economic Activity 2
(2004): 211-284.

74GAO, International Trade: U.S. and India Data on Offshoring Show
Significant Differences, GAO-06-116 (Washington, D.C.: Oct. 27, 2005).

75See, for example, Brookings Institution, "Services Offshoring: What Do
the Data Tell Us?" Summary of Data Workshop (Washington, D.C.: June 22,
2004); Office of Senator Joseph Lieberman, Data Dearth in Offshore
Outsourcing: Policymaking Requires Facts (Washington, D.C.: December
2004).

Table 1: Some Key Areas for Additional Research on Services Offshoring and
Possible Approaches for This Research

                            Concluding Observations

Services offshoring is likely to remain an important public policy issue
for years to come. The extent of offshoring could increase in the future
as technology advances, U.S. firms become more adept at offshoring, and
other countries continue to improve their abilities to provide services
for the global economy. Because the services offshoring phenomenon is
relatively new, little is known about its effects on the U.S. economy and
society. Due to limited data and empirical research thus far, the debate
about offshoring has largely been theoretical in nature. Policy makers and
analysts face data challenges as they seek to assess the wide range of
policies that have been proposed in response to offshoring. In making
these assessments, they may consider various relevant factors, such as the
magnitude of the problems that policy proposals seek to address, likely
effectiveness of the proposals, potential negative consequences, financial
costs to government, and feasibility of administration.

As the offshoring phenomenon continues, researchers in both the public and
private sectors are likely to conduct more studies and collect more data
that will provide a clearer understanding of offshoring and its effects.
We have highlighted some key areas where further research might help
advance the debate about the impacts and policy implications of
offshoring. While such research faces numerous challenges and limitations,
it offers some prospect for additional insights on diverse aspects of
services offshoring.

                                Agency Comments

We provided a draft of this report to the Departments of Commerce, Labor,
Treasury, and the Office of the United States Trade Representative. We
received written comments from Commerce, which are reprinted in appendix
III. Commerce stated that it appreciated the thoroughness of our review
and that the report will be a useful reference starting point for
discussions of the causes and impacts of offshoring. Commerce also stated
that offshoring may raise living standards for the average American and
affect fewer workers than the headlines seem to indicate, but that all of
us must be troubled when any American workers lose their jobs, for
whatever reason. Commerce added that the most powerful remedy for this
problem is a growing economy that can ensure every American who wants a
job is able to find one. Commerce, Treasury, and the Office of the U.S.
Trade Representative provided technical comments, and we modified the
report as appropriate to address these comments. The Department of Labor
did not have comments.

Copies of this report are being sent to the Departments of Commerce,
Labor, and Treasury; the Office of the U.S. Trade Representative;
appropriate congressional committees; and other interested parties. Copies
will be made available to others upon request. The report is also
available at no charge on the GAO Web site at http://www.gao.gov .

If you or your staff have any questions about matters discussed in this
report, please contact me at (202) 512-7215 or at [email protected] .
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Other contacts and
staff acknowledgments are listed in appendix IV.

Sigurd R. Nilsen Director, Education, Workforce, and Income Security
Issues

List of Committees

The Honorable Ted Stevens Chairman The Honorable Daniel K. Inouye Ranking
Minority Member Committee on Commerce, Science, and Transportation United
States Senate

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

The Honorable Michael B. Enzi Chairman The Honorable Edward M. Kennedy
Ranking Minority Member Committee on Health, Education, Labor, and
Pensions United States Senate

The Honorable John A. Boehner Chairman The Honorable George Miller Ranking
Minority Member Committee on Education and the Workforce House of
Representatives

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

The Honorable William B. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of
Representatives

Appendix I: Scope and Methodology Appendix I: Scope and Methodology

Our objectives in this study were to: (1) describe experts' views about
the potential effects of services offshoring on the U.S. economy,
workforce, national security, and consumer privacy; (2) describe the types
of policies that have been proposed in response to offshoring; and (3)
discuss areas where further research could advance the debate on
offshoring. Our methodology consisted of an extensive literature review
and interviews of selected experts. In addition, we attended several
conferences on services offshoring during the course of our work. We
conducted our work from May 2004 to November 2005 in accordance with
generally accepted government auditing standards.

We reviewed literature on services offshoring produced by academic
experts, think tanks, business groups, labor groups, and government
agencies such as the Congressional Research Service. Our literature review
built upon work conducted under previous GAO studies of services
offshoring.1 We collected additional literature by reviewing research
databases such as Econlit and Proquest and through general Internet
searches. We also conducted targeted searches of the literature produced
by various think tanks, interest groups, and other government agencies. In
addition, we were referred to literature through citations in other
literature, through media accounts, and by experts we interviewed. Through
the course of our work, we sought to obtain a diverse body of literature
that described various views on the potential effects of services
offshoring and policy proposals. For studies summarizing empirical
research findings, GAO reviewed these studies solely to describe the views
of various experts on the effects of offshoring and the research
methodologies they used. The inclusion of studies in this report does not
imply that we deem them definitive or that the evidence presented in them
is conclusive. Additionally some of these studies contain estimates of job
losses due to offshoring of services that are of undetermined reliability.
These estimates are presented for illustrative purposes and should not be
considered in the same manner as the official government data on
employment and trade discussed in the report. See the bibliography for a
list of key literature reviewed for this report.

We interviewed experts from government agencies, academia, think tanks,
and organizations representing business and labor interests. We met with
government officials at the departments of Commerce, Labor, and Treasury,
and at the Office of the U.S. Trade Representative because each of these
agencies analyzes issues related to offshoring. We selected other experts
to interview based upon literature they published related to the
offshoring phenomenon and through referrals by other experts. We strove to
obtain a balance of views among the experts we interviewed. In addition to
interviewing experts, we also reviewed interviews conducted for other GAO
work on services offshoring. See appendix II for a list of experts
interviewed for this report.

1We relied particularly upon literature collected for GAO, International
Trade: Current Government Data Provide Limited Insight into Offshoring of
Services, GAO-04-932 (Washington, D.C.: Sept. 22, 2004).

We also attended several conferences related to services offshoring to
obtain further viewpoints on this topic, including conferences organized
by the Brookings Institution, William Davidson Institute at the University
of Michigan Business School, CATO Institute, Labor and Worklife Program at
Harvard Law School and the North American Alliance for Fair Employment,
Stanford Business School's Sloan Masters Program and World Affairs Council
of Northern California, Asia-Pacific Research Center at Stanford
University, and the Bernard and Audre Rapoport Center for Human Rights and
Justice of the University of Texas School of Law.

Appendix II: List of Experts Interviewed Appendix II: List of Experts
Interviewed

Jodie Allen Senior Editor Pew Research Center

Robert Atkinson Vice President & Director Technology & New Economy Project
Progressive Policy Institute

Ashok Bardhan Senior Research Associate Fisher Center for Real Estate &
Urban Economics, Haas School of Business, University of California
Berkeley

William Baumol Professor of Economics New York University

Jagdish Bhagwati Professor of Economics Columbia University

Josh Bivens Trade Economist Economic Policy Institute

Susan Collins Senior Fellow, Economic Studies The Brookings Institution

Ralph Gomory President Alfred P. Sloan Foundation

Ron Hira Assistant Professor of Public Policy Rochester Institute of
Technology and Vice President for Career Activities, Institute of
Electrical and Electronics Engineers-USA

Josh James Manager of Research American Electronics Association

Matthew Kazmierczak Director of Research American Electronics Association

Martin Kenney Professor of Human and Community Development University of
California Davis

Lori Kletzer Professor of Economics University of California, Santa Cruz

Cynthia Kroll Senior Regional Economist Fisher Center for Real Estate &
Urban Economics, Haas School of Business, University of California
Berkeley

Jeff Lande Senior Vice President Information Technology Association of
America

Robert Lawrence Professor of International Trade and Investment Center for
Business & Government, John F. Kennedy School of Government, Harvard
University

Thea Lee Assistant Director for International Economics AFL-CIO

Robert Litan Senior Fellow Economic Studies The Brookings Institution

Catherine Mann Senior Fellow Institute for International Economics

Appendix III: Comments from the Department of Commerce Appendix III:
Comments from the Department of Commerce

Appendix IV: A Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contacts

Sigurd R. Nilsen, (202) 512-7215, [email protected]

Staff Acknowledgments

In addition to the contact named above, Andrew Sherrill, Assistant
Director; Yunsian Tai and Katrina Ryan, Analysts in Charge; Rhiannon
Patterson; Eric Wenner; Margaret Armen; Lawrance Evans, Jr.; and Tovah Rom
made significant contributions to this report.

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Defense Trade: Better Information Needed to Support Decisions Affecting
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Tax Policy and Administration: Review of Studies of the Effectiveness of
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To view the full product, including the scope

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Highlights of GAO-06-05 , a report to congressional committees

November 2005

OFFSHORING OF SERVICES

An Overview of the Issues

Much attention has focused on the "offshoring" of services to lower-wage
locations abroad. Offshoring generally refers to an organization's
purchase of goods or services from abroad that were previously produced
domestically. Extensive public debate has arisen about both the potential
benefits of services offshoring, such as lower consumer prices and higher
U.S. productivity, as well as the potential costs, such as increased job
displacement for selected U.S. workers.

In response to widespread congressional interest, GAO conducted work under
the Comptroller General's authority to help policy makers better
understand the potential impacts and policy implications of services
offshoring. This report: (1) provides an overview of experts' views on the
potential impacts of services offshoring, (2) describes the types of
policies that have been proposed in response to offshoring, and (3)
highlights some key areas where additional research might help advance the
debate about offshoring.

In its comments, the Department of Commerce generally agreed with the
findings of this report. Commerce, Treasury, and the Office of the United
States Trade Representative also provided technical comments that have
been incorporated as appropriate.

Analysts of the offshoring phenomenon have expressed a range of views
about the likely impacts of offshoring on four broad areas. The differing
views reflect several factors: the fact that services offshoring is a
relatively recent development whose impact is not fully known, the
limitations of available data on offshoring, and different theoretical
expectations about how services offshoring will impact the U.S. economy.
These four areas are:

           o  The average U.S. standard of living:  Traditional economic
           theory generally predicts that offshoring will benefit U.S. living
           standards in the long run. However, some economists have argued
           that offshoring could harm U.S. long-term living standards under
           certain scenarios, such as if offshoring undermines U.S.
           technological leadership.

           o  Employment and job loss: While economic theory generally
           predicts that offshoring will have little effect on overall U.S.
           employment levels in the long-run, there is widespread recognition
           that pockets of workers will lose jobs due to offshoring, though
           there is disagreement about the expected magnitude of job loss and
           implications for displaced workers.

           o  Distribution of income:  Some economists maintain that
           offshoring could increase income inequality in the U.S., while
           others argue that changes in the income distribution are driven
           primarily by factors other than offshoring, such as technological
           change.

           o  Security and consumer privacy: Experts express varying degrees
           of concern about the impact of services offshoring on the security
           of our national defense system and critical infrastructure-such as
           utilities and communication networks-as well as the privacy and
           security of consumers' financial and medical information.

A wide range of policies has been proposed in response to concerns about
offshoring and its potential effects. These proposals can be categorized
into four areas by the concerns they seek to address: (1) improving U.S.
global competitiveness, (2) addressing effects on the U.S. workforce, (3)
addressing security concerns, and (4) reducing the extent of offshoring.
Some analysts have recommended policies in more than one area.

Determining appropriate policy responses to the offshoring phenomenon is
challenging due to the limited state of knowledge about the extent and
impacts of offshoring. Nonetheless, there are some key areas where
additional research might help advance the debate, such as trends in the
wages and skill levels of jobs being offshored, reemployment experiences
of workers displaced by offshoring, and the extent to which current laws
and practices in different sectors of the economy mitigate any increased
security-related risks posed by offshoring. In the face of limited federal
data, researchers have begun using a variety of approaches to examine such
areas.

Offshoring of Services

Lee Price Research Director Economic Policy Institute

Robert Reich Professor of Social and Economic Policy Brandeis University

Dani Rodrik Professor of International Political Economy John F. Kennedy
School of Government, Harvard University

Enrique Sanchez Director Bank of America (retired)

Robert Scott Director of International Programs Economic Policy Institute

Timothy Sturgeon Senior Research Affiliate Industrial Performance Center
Massachusetts Institute of Technology

Diane Swonk Chief Economist Mesirow Financial

Offshoring of Services Offshoring of Services Offshoring of Services
Offshoring of Services

Hira, Ron and Anil Hira. Outsourcing America: What's Behind Our National
Crisis and How We Can Reclaim American Jobs. New York, N.Y.: American
Management Association, 2005.

Institute of Electrical and Electronics Engineers. "Position on Offshore
Outsourcing." March 2004.
http://www.ieeeusa.org/forum/positions/offshoring.html . (accessed Aug. 4,
2004).

Jensen, J. Bradford and Lori G. Kletzer. "Tradable Services: Understanding
the Scope and Impact of Services Offshoring," July 14, 2005. Forthcoming
in Brookings Trade Forum 2005: Offshoring White-Collar Work-The Issues and
the Implications, Lael Brainard and Susan M. Collins, ed.

Kane, Timothy, Brett D. Schaefer, and Alison Fraser. "Myths and Realities:
The False Crisis of Outsourcing." Backgrounder. 1757. Washington, D.C.:
Heritage Foundation, May 13, 2004.

Kirkegaard, Jacob F. Outsourcing-Stains on the White Collar? Institute for
International Economics.

Klein, Michael W., Scott Schuh and Robert K. Triest. "Job Creation, Job
Destruction, and International Competition: A Literature Review." Working
Paper 02-7. Boston, Mass.: Federal Reserve Bank of Boston, December 2002.

Klinger, Shannon and M. Lynn Sykes. Exporting the Law: A Legal Analysis of
State and Federal Outsourcing Legislation. Arlington, Va.: National
Foundation for American Policy, April 2004.

Kroll, Cynthia A. "State and Metropolitan Area Impacts of the Offshore
Outsourcing of Business Services and IT." Fisher Center Working Paper 293.
Berkeley, Calif.: University of California, Berkeley, Fisher Center for
Real Estate & Urban Economics, 2005.

Leana, Carrie R., Daniel C. Feldman, and Gilbert Y. Tan. "Predictors of
Coping Behavior after a Layoff." Journal of Organizational Behavior 19:1
(January 1998): 85-97.

Lindsey, Brink. "Job Losses and Trade: A Reality Check." Trade Briefing
Paper 19. Washington, D.C.: CATO Institute, March 17, 2004.

MacDonald, James M. "Does Import Competition Force Efficient Production?"
The Review of Economics and Statistics 76:4. (November 1994): 721-727.

Mann, Catherine L. "Globalization of IT Services and White Collar Jobs:
The Next Wave of Productivity Growth." International Economics Policy
Briefs PB03-11. Washington, D.C.: Institute for International Economics,
December 2003.

Mann, Catherine L. "Offshore Outsourcing and the Globalization of US
Services: Why Now, How Important, and What Policy Implications." In The
United States and the World Economy: Foreign Economic Policy for the Next
Decade. Washington, D.C.: Institute for International Economics, January
2005.

Mann, Catherine L. "This is Bangalore Calling: Hang Up or Speed Dial? What
Technology-Enabled International Trade in Services Means for the U.S.
Economy and Workforce." Cleveland, Ohio: Federal Reserve Bank of
Cleveland, January 15, 2005.

Markusen, James R. "Modeling the Offshoring of White-Collar Services: From
Comparative Advantage to the New Theories of Trade and FDI." Paper
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Issues and the Implications, Washington, D.C., May 12-13, 2005.

McKinsey Global Institute. Offshoring: Is It a Win-Win Game? San
Francisco, Calif.: August 2003.

neoIT. "The Effect of Data Privacy & Security Regulations on Services
Globalization." Offshore Insights White Paper Series 2:9. San Ramon,
Calif.: September 2004.

neoIT. "Research Summary: Offshore & Nearshore ITO Salary Report 2004."
Offshore Insights Market Reports Series 3:5. San Ramon, Calif.: May 2005.

Office of Senator Joseph I. Lieberman. Data Dearth in Offshore
Outsourcing: Policymaking Requires Facts. Washington, D.C.: December 2004.

Office of Senator Joseph I. Lieberman. Offshore Outsourcing and America's
Competitive Edge: Losing Out in the High Technology R&D and Services
Sectors. Washington, D.C.: May 11, 2004.

Ong, Paul M. and Don Mar. "Post-Layoff Earnings Among Semiconductor
Workers." Industrial and Labor Relations Review 45:2 (January 1992):
366-379.

Parry, Robert T. "Globalization: Threat or Opportunity for the U.S.
Economy?" FRBSF Economic Letter 2004-12. San Francisco, Calif.: Federal
Reserve Board of San Francisco, May 21, 2004.

Public Citizen's Global Trade Watch. Addressing the Regulatory Vacuum:
Policy Considerations Regarding Public and Private Sector Service Job
Offshoring. Product ID E9012. Washington, D.C. April 2004.

Rao, Madhu T. and William Poole. "Global Information Technology Sourcing:
Impacts and Implications for Washington State." Seattle, Wash.: RATEC and
Seattle Chapter of the Society for Information Management, July 2004.

Republican Policy Committee. Outsourcing: Meeting the Challenges Without
Destroying the Benefits. Washington, D.C.: March 3, 2004.

Rodriguez, Francisco and Dani Rodrik. "Trade Policy and Economic Growth: A
Skeptic's Guide to the Cross-National Evidence." NBER Working Paper 7081.
Cambridge, Mass.: National Bureau of Economic Research, April 1999.

Ruffin, Roy J. "The Nature and Significance of Intra-Industry Trade."
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Dallas, fourth quarter 1999.

Samuelson, Paul A. "Where Ricardo and Mill Rebut and Confirm Arguments of
Mainstream Economists Supporting Globalization." Journal of Economic
Perspectives 18:3 (summer 2004): 135-146.

Schultze, Charles L. "Offshoring, Import Competition, and the Jobless
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Seshasai, Satwik and Amar Gupta. "Global Outsourcing of Professional
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Stiroh, Kevin J. "Information Technology and the U.S. Productivity
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Report to Congressional Committees

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GAO

November 2005

OFFSHORING OF SERVICES

An Overview of the Issues

GAO-06-5

On December 19, 2005, this report was revised to correct the omission of
(1) an individual from the list of experts interviewedon page 68 and (2) a
published source from the bibliography page 78.
*** End of document. ***