How does outsourcing US manufacturing contracts overseas impact local economy?

As tax and labor laws change, many companies debate moving their factories overseas. These decisions can have a drastic impact on the cost of goods as well as other aspects of the economy. Keep reading to understand how some business leaders view the costs versus the benefits of manufacturing overseas.

Affordable Product Price with Ethical Issues

Outsourcing overseas allows businesses to obtain goods at much lower costs because raw materials don’t have to be imported and labor costs can be much cheaper. While all of this helps businesses financially and can work to boost local economies by lowering the prices of products, many people have ethical issues with overseas outsourcing (like workers being exploited).

Job Losses for the Locals

Outsourcing manufacturing jobs to another country (a process known as ‘offshoring’) can have advantages for the local economy, but it can also come at a huge cost. It all depends on the circumstances.

Typically, the advantages of offshoring are gained by the firm involved, assuming that it was done to reduce costs or for some other efficiency gain. Additionally, the customers of that firm should also gain since it should lead to either a better product or a cheaper product. For obvious reasons, these customers tend to be distributed over a wide geography when dealing with manufactured products, because they can often be shipped almost anywhere in the world.

For the local economy, the biggest costs are usually borne by the local workers who lose their jobs. If the manufacturer is a major employer, the extent of the offshoring may be large enough to cause significant knock-on effects that affect other businesses in the area. This happens when the laid-off workers are forced to make cuts to their normal spending habits such that other local businesses make fewer sales and less profit. [This trend] leads to closures and yet more job losses.

A downward spiral can develop in the economy, with growing structural unemployment problems. Structural unemployment occurs when redundant workers find that their skills are unsuited to the alternative jobs that might be available. In this case, it may be necessary for workers to retrain or accept an entry-level job for lower pay.

It’s also common for an outflow of the most talented and skilled people to occur, as they seek employment elsewhere. That outflow can lead to falling house prices in the area due to simple supply and demand forces (assuming that it is not matched by additional people wanting to move into the area). This whole process can be devastating.