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Import tariffs and outsourcing code

Here's my theory and I'm submitting it for peer review:

Imposing tariffs on imported commodities leads to outsourcing jobs to the third world.

Here's how (The numbers are my own, and conservative):

The government imposes import tariffs on apple juice from China and tomatoes from Mexico to make our local producers more price-competitive.

Hence a meal with these ingredients that would otherwise cost $1 is about $5 now.

As a result, Americans who work in an unprotected, free-market industry like software now need to be paid that much more for the same standard of living.

So where you could've hired only 2 Chinese/Indian programmers, you're getting 5 for the price of one US programmer.

The US free market takes into account quality and reliability, weighs it against the price advantage and say, hires 1 American programmer for every 3 from the third world.

Without these import tariffs, we could've made this ratio 1:1.

I agree that for political reasons, programmers in third world countries would work for much less. But since that applies to their tomato producers as well, I'm not sure it has a terrible impact.

I also submit that the cost of living in the US is not a consequence of the higher standard of living and that reducing the cost of living only improves the standard of living.

In conclusion, I think the US government should seriously consider opening up all our industries, eliminate tariffs, and espouse free market principles across the board.

The way we're going I suspect we'll lose the edge in technology very soon.

ltarian
Friday, March 28, 2003

First, the idea that you don’t protect some industry is silly.

Further, the assumption that those programmers don’t benefit from the Apple juice farmers people being protected is also silly. Fact is, many of those apple farmers will now be paying taxes. They will contributing to health care and also hiring more people (and some will be software people). They will also be hiring programmers and purchasing services and using software to help run their apple business. So, by protecting those apple farmers, you can in fact make more jobs, and some will be for software people. I am not saying we should do this, but is it obvious that other industries can and do benefit form the protection.

So, your whole pretext is based a rather simplistic economic analyses here. To not even have mentioned any issue of elasticity in the demand of the product, and zillion other economic issues here rally begs for a more detailed analysis. You also have to factor in the spin off jobs, and the tax issues here are VERY important.

The economy is far more complex then something so simple as stating that we open up all industries to foreign competition. That is simply UN reasonable, and UN- workable.  No Country has anything remotely close to attemping this.

There also many issues to deal with here. If the country is wealthy and making billions of dollars, then we don’t care about those apple Juice framers anyway do we? I don’t think software developers cared about steel workers being laid off during the height of the dot com boom!

However, one idea I do think that is the best soltion is:

You trade with us, you must run a balanced trade!

This is so simple. That means right now if Japan wants to sell more VCR’s in north America, they will have to stop buying coal from Australia. (or at least purchase as much more coal from the USA as  equal to the number of VCRS they want to sell here). They will have to decide if purchasing slightly cheaper coal from Australia is better then selling less VCR’s in USA. (in other words, they will decide their trade polity…not us!!). They could also sell more VCR’s at a cheaper price if they wish, but would have to still balance their trade with us.

This is very simple, and elegant solution to the trade problems we have right now.

This also results in some countries actually selling  their trade surpluses to other counties that wish to do business with us.

So, if you are going to remove all protection (which is just not possbile anyway), then you better implement something in its place.

I never really did like the Economics courses I took at university, as they tend to over simplify things. I not sure where, or what economic theory you are basing your ideas on, but you going to need a lot better numbers and analyses to convince me.

For me, and my brains…I balanced trade is the answer.

Albert D. Kallal
Edmonton, Alberta Canada
Kallal@msn.com

Albert D. Kallal
Saturday, March 29, 2003

I won't even pretend to be an economist, but what happens in these three scenarios?

1)  The foreign companies destroy local competition because they have much better advantage.  The foreign companies inevitably then raise prices, and it will take years for local companies to regain the knowledge lost.

2)  Foreign products increase dependence on outside actors.  While this is more efficient and lowers prices, it decreases sustainability and redundancy, and the markets will be more sensitive to outside (uncontrollable) problems.

3)  The ability to control trade is occasionally important, since countries often attempt to control one another.  The country that has lost its experience doing this will have a hard time finding competent people to deal with trade.

Tj
Saturday, March 29, 2003

In reply To Albert... Mmm, balanced trade looks awfully  like a managed economy, don't it?

Besides being very difficult to handle in the real world, producers grow complacent since they don't feel the pain of competition, or at least not as hard.

When you think about it, there is no economic reason why we allow capital to flow freely around the world, but ban human beings from moving to wherever they will make a better living and contribute indirectly to world growth. Hence, imposing tariffs to make it more pricey for US companies to outsource SW development to third-world countries ends up hurting everyone (US workers having to pay more for software due to artificially lower competition; third-world countries being kept underdeveloped due to tariffs imposed by first-world countries and not having the means to buy more from those first-world countries).

And we should not forget that economics is very, very, very far from being an exact science...

Frederic Faure
Saturday, March 29, 2003

"but ban human beings from moving to wherever they will make a better living"

By this you mean America since that's where everybody people want to move to -- the place they are burning the flag of.

"and contribute indirectly to world growth"

I think the Islamic Republic of America will be less productive not more. And who needs the honor killings and beheadings anyway. Though I suppose we can look forward to illicit wet burqa contests.

Tony Chang
Saturday, March 29, 2003

For F Sake everyone, read some Adam Smith and brush up on your comparative trade advantage stuff.

Protecting local industry is detrimental to the macro economy.  If a job is best done somewhere else, find a job that is best done where you are.

And that means that if you are a programmer and you cannot find work, maybe you should find a line of work that is in demand locally (or move to where it is in demand).

If an economist was to comment on the comparative advantages of unchecked exceptions over checked exceptions, you'd be all over him pointing out his lack of insight.  So why are you all trying to tell the economists what to do when it comes to macro economics??

The politians, protecting their local industry, have been F*ing the global economy since ., and it doesn't help the world.

Being programmers, if you read some Smith you'd probably understand the basic self-evident maths involved.  But if you remain ignorant..


Saturday, March 29, 2003

Itarian,

I thought your analysis was very good, but I don't really agree with your conclusion.

"In conclusion, I think the US government should seriously consider opening up all our industries, eliminate tariffs, and espouse free market principles across the board."

"The way we're going I suspect we'll lose the edge in technology very soon."

Correct me if I'm wrong, but tariffs are not very high now - in the 10-30% range, and zero within NAFTA and select Latin countries.

With China, also, tarrifs are low with many rates in the range of 30%, being reduced to 10-15% through WTO agreements.  At least what I've read - again, I'm not expert, so correct me if I'm wrong.

Also, I'm not aware of any tariffs on services - like software.  It appears that in today's economy you can shop out anything you like and bring in finished product tariff free.

As far as I know, we're already in the world you propse.  And have been for the last 10 years.

Nat Ersoz
Saturday, March 29, 2003

There is an argument that economics is not really a science at all. No control groups and so on. So you could conclude that it is all a lot of speculative nonsense, regardless of whether Adam Smith wrote some ideas down in a book or not. Although being a mere techie I wouldn't know who he is. Didn't he invent the steam engine or something?


Saturday, March 29, 2003

If labor could move back and forth between different countries as freely as goods can, and it is done in a slow manner the result won't necessarily be that everybody floods into America.

One of the main reasons that the workers in various industries outside the US will work for so much less is that they don't have the freedom to get up and go to any other country.  For the most part they are forced to accept the salary of the captive labor force in their country. For example, American car companies have made use of NAFTA to send car factories outside of the US.  But if the next amendment to NAFTA allowed Mexican auto workers to freely work in US auto factories (and vice versa), they would have to pay the Mexican workers more to keep them there.  At the same time, wages in the US would decrease initially due to the increased labor supply into the US - but eventually the American wages would increase again as more production is brought back into the US because it no longer is profitable to build as many cars in Mexico.

Similarly, if programmers in India could freely move to anywhere in the world, outsourcing to India would be less profitable because the offshore vendors would have to pay wages so high.  Those who remain in India would be paid well enough that most would not want to leave, while others would flow to parts of the world where their skills are in high demand.

T. Norman
Saturday, March 29, 2003

Anyway, tariffs on software is an unworkable idea. It is nearly impossible for the government to detect the movement of software into the country and properly determine a taxable amount.  They'll often end up taxing open source software while another company's $50-million system goes undetected.

T. Norman
Saturday, March 29, 2003

I'm not sure I agree with your analysis of the state of tarrifs in the U.S. Nat. I'm from New Zealand (currently living in Australia, working in India) where the government removed pretty much all of the government-imposed tarrifs and subsidies in the mid 1980s. At the time, this caused a lot of pain as industry (particularly farming which is a large part of the N.Z. economy) had to move from being protected by the government to being forced to compete on a "level playing field" with imported goods.

From my perspective this lead to a mindshift and New Zealanders, or at least New Zealand business, are very aware of the need to be competitive and to offer a high quality of service. Personally I believe that N.Z. is further down the track than Australia here - a friend who works in manufacturing management (pulp & paper and now F.M.C.G.) also believes this (having managed factories and operations in both N.Z. and Australia).

Realistically, though, the playing field is not level because European and U.S. markets subsidise their own goods and/or impose tarrifs on imported goods. I remember about this time last year the Bush administration approved continued farm subsidies in the U.S. and I also remember seeing a documentary about the (scandalous) subsidies on sugar cane in the U.S.. This is particularly frustrating because European and U.S. leaders continue to talk about "free trade" while we're like "W.T.F., buy some of our butter!".

The consequence of this is that N.Z. goods have a hard time competing on price with goods from countries they are imported to (I'm talking about farm goods), so the marketing of N.Z. goods focuses on quality of goods (the most expensive meal on room service in the hotel I'm staying in in Mumbai is "New Zealand lamb chops"... apparently they're from Australia :) ) and a "clean green" image.

And this is what I would say is needed by the U.S. software industry to compete with outsourcing (well, by the software industry in general). Step back and look at the legacy of the tech industry - there is a huge failure rate in software development projects, dotcom crashed and burned expensively (what's more competitive than the Internet?). If you're a business buyer you're going to be very wary of the price you pay for software development, so the  (perceived) lower cost of outsourced code is attractive. Furthermore, anyone who has worked in the software industry (or read Joel On Software) knows that development management has a long way to go.

To compete with cheaper goods here are some suggetions I would (humbly) have for the industry:
- focus on developing generic products and not one-off projects to exploit economies of scale and the extremely low marginal costs associated with shrink-wrap software (currently most Indian firms seem to specialise in business-process-outsourcing, i-flex seems to be a notable exception, although I sense a lot of these firms are doing a FogCreek and using consulting to fund development of shrink wrapped products)
- work harder to achieve code re-use across projects; again this is a marginal cost issue (even if you develop one-off projects if you can make the bulk of the work simply a matter of configuration then it should be easier, faster, cheaper)
- make sure you consider usability and earn a reputation for highly usable products
- be more customer focused; consider cost to the customer and what they want the software to achieve
- earn a reputation for quality; value experienced staff

This already happens in the industry today - IBM and Oracle products are more expensive than Microsoft products because people that perceive IBM and Oracle offer higher quality products. (Sadly in the case of these two it seems to be largely perception :), but you do see REAL quality development work happening in the Java space by European companies like IntelliJ/JetBrains and Orion/IronFlare). Another example - people pay for J2EE containers when they could use JBoss. And another - Red Hat Linux.

Yes, the industry (at least in the "West") is in pain, but I think/hope that it's "good" pain - management of software development will have to improve or the work will go away.  I'm focusing on the optimistic thought that the development process will get better because the easy money days are over.

Walter Rumsby
Saturday, March 29, 2003

Itarian wrote, "In conclusion, I think the US government should seriously consider opening up all our industries, eliminate tariffs, and espouse free market principles across the board."

Well, I am not going to get into a heated debate about macro economics with a bunch of programmers (we don't make policy). However, I will make some comments and then leave it at that (I don't plan on posting again in this thread).

I think Itarian needs to re-think his conclusion.

American businesses have been arguing the same conclusion Itrarian came up with for quite some time. Countries such as Japan, China, India, just about all of the South American countries, etc. have argued that they need to protect their industries from American businesses because [insert various reasons why here].

Keep in mind that there are other methods besides import tariffs that countries can use to prevent foreign companies from competing with local businesses.

IMO, on the whole American markets are more open to outside competition than just about any other country in the world (wasn't always this way though).

As far as free markets vs. closed markets go all I will say on this subject is this: "I have heard/read good arguments from both sides of the debate from economists throughout the world. I know where I currently stand on this subject, however it is based on a "gut feeling". I plead ignorance when it comes to macro economics. Then again, I bet most economists privately do the same thing.  ;-)

One Programmer's Opinion
Saturday, March 29, 2003

Nameless No 3, offshoring and before it the H1-B program are not about global efficiencies. Offshorers charge prices only slightly lower than their American competitors, even though wage rates for Indian staff are less than a tenth than for American staff. In other words, business owners and dodgy entrepreneurs are pocketing massive profits without reducing end prices at all.

The experience of Senator Shirley Turner of New Jersey is highly instructive. Senator Turner found that an offshoring firm, after obtaining a government contract, sacked its American workers and moved the work to India. It still charged the government the same price.

http://www.eweek.com/print_article/0,3668,a=39100,00.asp

In fact, offshorers deliver such large profits that I think there's a significant risk of criminal activities and corruption.

Another factor I haven't seen mentioned is that cheaper labour reduces the motivation for companies like Dell to provide quality products. The high cost of support used to ensure products were reliable. Outsourcing reduces this requirement, potentially imposing a big hidden cost on us, their customers.

Also, if you like reading Adam Smith, you should also read Galbraith and Keynes. Galbraith is head of the University of Texas Inequality Project.

He says: "there is no general case, in Europe or elsewhere, of countries achieving sustained new prosperity by cutting real wages or accepting increased poverty for parts of their population. Despite great efforts, the economists have failed to show that minimum wage laws or unions cost jobs. ...We have found that worldwide inequality has been rising sharply under globalisation."

You should also read the latest report by the International Monetary Fund's chief economist, Kenneth Rogoff, which seems to admit the IMF has been wrong in its attitude to capital investment in developing countries. Rogoff says that: "An objective reading of the vast research effort to date suggests that there is no strong, robust and uniform support for the theoretical argument that financial globalisation per se delivers a higher rate of economic growth."

&me
Sunday, March 30, 2003

Walter Rumsby, there's a reason Indian firms concentrate in business development; that area is easier for less capable development efforts. Productised software requires first class expertise.

You advise local firms to build a reputation for quality. Unfortunately business and government buyers are encouraged to focus on written cost. To develop this suggestion of yours a bit further, though, local firms need to educate buyers about the hidden costs of maintenance, productivity and competitiveness in software developed by less capable firms.

You also talk about the "easy money" days being over, in the context of this generating fiercer competition that programmers must fight. I would put it to you that offshoring and other programs are all about easy money, but programmers are not the beneficiaries, just as they weren't the primary beneficiaries or instigators of the dot com boom.

Regarding New Zealand, many people consider that its economic reforms were disastrous. The government was ejected in no uncertain terms. Galbraith's research, referred to above, found that income inequality increased in New Zealand more than among any other OECD country.

& me
Sunday, March 30, 2003

& me:

The OECD also claimed that New Zealand had the highest rate of youth crime, and then discovered that their calculation was completely whack ( http://www.nzherald.co.nz/storydisplay.cfm?thesection=news&thesubsection=&storyID=3099396 ). While I would believe that the wage differentials in New Zealand have increased we're talking about transitioning from an essentially socialist, very managed economy and a country with a very strong egalitarian spirit (first country with social welfare system, first country to give women the vote, first contry with transgender MP, possibly the first country with a rastafarian MP). You wouldn't find very many New Zealand CEOs earning $NZ 1million (roughly $US 0.5million) salaries. I for one believe that if the mid '80s reforms hadn't happened the New Zealand economy wouldn't have performed "better than any other in the first world" last year (4.4% growth), basically the country would be in massive debt with even higher rates of emmigration (even though the "OE" is seen a rite of passage). The current government has softened the hard-line ideology of the market reforms with pragmatism, but the economic policy has been essentially the same since 1984 (Labour government 1984 - 1990, National government 1990 - 1999, Labour government 1999 -) and "dry" economic policy is more or less accepted as mainstream (a prominent Labour MP formed the libertarian party ACT; high profile left-wing columnist Russell Brown - http://www.publicaddress.net/default,hardnews.sm - is an economic "dry", etc) - it was interesting/amusing to watch Australia squirm at the prospect of GST while they were remained unaware how overly bureaucratic, complex (and ultimately costly and inefficient) their exsisting taxation system is.

As you know I'm currently in India at the moment and I agree with you that it does seem that the upper levels in the outsourcing industry are "pocketing the change" (from what I understand a company like InfoSys doesn't charge that much less than IBM for BPO work) and its very apparent to me that there are extremely wealthy people here and extremely poor people here.

If American programmers are concerned about Indian outsourcing perhaps they should petition their government to get the Indian government to do something about the economic disparity within India (and do something about the pollution in Mumbai, please). They should also buy some New Zealand butter too :).

Walter Rumsby
Sunday, March 30, 2003

" ...We have found that worldwide inequality has been rising sharply under globalisation."

The problem is that we have globalization of goods without globalization of labor, and one without the other will tend to promote inefficiency.  The reason why many goods can be manufactured cheaper outside the US is not because other countries have better technology or techniques; it is simply because the labor is cheap.  They compete by having masses of $1/day sweatshop workers, without much incentive to use technology or intelligent inventory management to become more efficient in per-person output.  Their "efficiency" is in costs, but in terms of human effort they are usually worse off.

If labor were as free to move from country to country as their products, labor would flow towards the companies/countries that are most efficient in their output per-person, because those would be the places that are willing and able to pay the most for labor. The $1/day sweatshops would have to pay more to retain workers, which would force them to upgrade their technology to become more efficient or go out of business. In the end we'd have both cheap goods and well-paid workers.

But because labor cannot migrate freely, there is the artificial depression of wages in certain countries, and the use of high volumes of inefficient labor is perpetuated.

T. Norman
Sunday, March 30, 2003

Economics always tends to chaos because its a set of formulas around an independant variable.  Money  no longer has any real value its always a notional one.

Balanced trade would provide nothing except free trade for the largest trading groups, that's partially why we now have large trading groups.  Small trading nations would always be in a hole.

This is an insoluble problem and its the wrong problem, the right problem is how we feed and clothe everyone before they have to worry about their personal trade deficit.

You may send me $1 to discover this marvellous solution.

Simon Lucy
Sunday, March 30, 2003

ltarian,

To make a very long story short, current economical policies are the only known way to feed 6 billion people.

Your model simply misses this point.

Dino

Dino
Monday, March 31, 2003

Surely current economic policies are just another of a long list known *not* to feed 6 billion? Or did you just wake up from some kind of dream just before you posted?

 
Monday, March 31, 2003

noname,

The current economical practices can feed 6 billion for the next little while. IMO there is a bigger problem somewhere else.

Currently we are 6 billion and growing. This change is quite recent - we went from 1 billion to 2 billions in only 123 years, and from 5 to 6 in only 12 years. Why? Because of practices of sanitation and modern medicine. "It's not because people started breeding like rabbits. It's that they stopped dying like flies."

Of course good healthcare systems requier working economies or there would be nobody to pick up the bills. Now, building a working economy is something humanity is getting better and better at.

Then why aren't we seeing wealth and happiness everywhere on this planet? The real problem is that current social practices cannot control population growth properly. An uncontrolled population growth can be destructive because it may locally block economical development. IMO the solution is education - which is observed to slowdown the population growth. Changing economical policies won't do.

Personally, I take steps and contribute the best I can in The Hunger Project ( www.thp.org ) and just this year I helped building up a school in India (rural area near Agra). I'm also planning to contribute to the fund for Afghan girls setup by the National Geographics.

What have you done lately?

Dino

PS Removing import tariffs is childish.

Dino
Tuesday, April 01, 2003

Congratulations on your good work Dino. A good contribution. If everyone did the same the world would be a better place.

However it's also true that the current system is NOT feeding six billion people. Millions in Africa are starving, or dying from diseases that could be cured by providing clean water or a few dollars worth of innoculations.

Starvation is not caused by overpopulation. There is actually more than enough food in the world to feed all six billion of us. Most western countries destroy food that they cannot sell, or offer farmers incentives to grow less food. What the West spends on pet food would fix the African hunger problem.

The problem is simply one of economics. Unless they have the money to pay for it, the people who need it do not get the food they need.

David Clayworth
Friday, April 04, 2003

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