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On March 4, the U.S. Senate voted 70-26 to extend a ban
on the granting of federal contracts to American
companies for work undertaken abroad. The measure also
prohibits state governments from using federal money to
procure goods and services from foreign companies.
The Senate action is noteworthy for three reasons:
First, the March 4 legislation is merely the latest in a flurry
of Congressional measures aimed at curtailing foreign
outsourcing, which is widely seen as a major contributor to
the woes of the still-sluggish U.S. labor market. One bill,
sponsored by Senate Minority Leader Tom Daschle and
endorsed by John Kerry, would require American firms to
provide three months’ advance notice of any foreign
initiative involving the overseas transfer of more than 14
jobs. Senate Democrats are also promoting legislation that
would require the overseas call centers of U.S. companies
to disclose their physical locations to customers. Another
Senate measure would bar the issuance of federal loans,
grants, and guarantees to U.S. firms that terminate more
workers at home than abroad.
The economic logic of these initiatives is questionable. For
example, it is unclear what if any affect the geographic
disclosure requirement would have on call service
outsourcing: Will American software users seeking afterhours technical assistance indignantly hang up when they
learn that the support person is located in Bangalore?
Other proposals appear self-defeating: The restrictions on
federal financing of American firms that engage in
outsourcing would presumably include trade credits issued
by the Export-Import Bank, whose chief function is to
promote foreign sales of American-manufactured
products. Equally dubious is the provision of the March 4
bill concerning use of federal funds by state governments,
whose inability to seek cost efficiencies via foreign
procurement would exacerbate their well-publicized
budgetary problems.
Second, while Congressional Democrats are leading the
anti-outsourcing battle, the campaign enjoys wide
bipartisan support that belies the supposed ideological
Copyright © 2004 Global Economics Company
divide between the two political parties. Joining the
unanimous Democratic endorsement of the March 4 bill
were 24 Republicans, including several leading
conservatives (Graham of South Carolina, Grassley of
Iowa, Hutchison of Texas, McConnell of Kentucky) as well
as Senate Majority Leader Bill Frist. The bipartisan nature
of the current attacks on outsourcing echoes earlier
political alignments over President Bush’s steel tariffs, with
prominent liberals (e.g., Maryland’s Barbara Mikulski)
joining pro-market conservatives (Pennsylvania’s Rick
Santorum) to endorse the Administration’s claims that the
tariffs were a necessary antidote to “unfair” import
competition. Together with the trade rhetoric surrounding
the presidential campaign, Congress’ protectionist tilt calls
into question the credibility of American leadership of
international economic liberalization.
Third, the March 4 outsourcing measure is part of a
corporate tax amendment that the Senate is writing in
response to threatened trade sanctions by the European
Union, which in late February received authorization from
the World Trade Organization to impose up to $4 billion in
penalties on U.S. exports. The origin of this latest
transatlantic trade flap is the Foreign Sales Corporation
Replacement Act, signed by President Clinton in
November 2000 to provide tax breaks to American
exporters. In January 2002, the WTO validated the EU’s
claim that the Act represented an illegal export subsidy
and gave Washington two years to remove to the
extraterritorial income (ETI) exclusion from the U.S. tax
code. Similar to its strategy in the steel case, the EU’s
sanction list in this dispute is carefully targeted to inflict
maximum pain on politically sensitive industries (fruits,
vegetables, paper, toys, leather) while sparing large
American manufacturers that enjoy privileged relations
with European importers (e.g., Boeing).
To compensate for the removal of ETI, Senate conferees
are negotiating alternative corporate tax breaks, some of
which would benefit the very same multinational firms that
American politicos are castigating for outsourcing—
underscoring the degree to which the politics of special
interests have contaminated U.S. foreign economic policy