|Working Papers logo 130||
In American policy debates, outsourcing commonly refers to the practice by U.S. corporations of re-locating factories abroad in order to lower costs. The villains in the story, as told by the media, are the low-wage workers of Mexico or China, who are stealing jobs from U.S. But outsourcing simply obeys the law of comparative advantage. The importing country benefits by obtaining goods at lower costs, while the exporting nation, which can produce the good more efficiently, benefits with jobs and economic activity. Criticism arises from displaced workers and different regulatory environments, but most agree that moving productive capacity to more efficient places improves overall economic welfare. Outsourcing, properly understood, is merely a manifestation of international trade, with all of its benefits and side-effects.