Threats to the International Trade Regime: Economic and Legal Challenges Arising from Anti-Offshoring Measures Across the Globe

Abstract

The stability and growth of the international trade regime is threatened by the emergence and proliferation of anti-offshoring measures by governments worldwide. The business practice of offshoring transfers domestic production of goods and services abroad as a means of achieving optimal use of a firm’s resources and capitalizing on comparative advantage. While companies have relocated manufacturing activities for centuries, the emergence and growth of services offshoring in recent decades has not only contributed significantly to greater global economic growth and prosperity, but also ignited a fluctuating frenzy of protectionist fears and measures at national and sub-national levels against offshoring that continues to the present day. Such a backlash is based on concerns that offshoring results in domestic job losses, wage reduction and inequality, and disruption of business innovation and productivity. This motivates examination of the legitimacy of these perceptions and the legality of governmental actions in the offshoring arena, as such measures undercut and potentially violate the commitments made by nations to the World Trade Organization and various other trade agreements. In the United States, the majority of state governments have proposed anti-offshoring bills, several of which have been enacted. The US Constitution empowers the federal government with exclusive authority over the areas of interstate commerce, foreign affairs and foreign trade. All these constitutional principles are arguably violated when state governments enact anti-offshoring legislation. The US experience is not singular, as similar policies are being considered and/or implemented in other nations or nation-groups. In particular, the European Union (EU) and a host of other countries have adopted discriminatory measures relating to personal data protection that place foreign service suppliers at a disadvantage compared to their domestic counterparts. These countries and the EU are strong proponents of free trade and have signed onto a variety of trade agreements. Adherence to these commitments means accepting that free trade is a two-way street, and comes with benefits and constraints. Furthermore, countries must look beyond restrictive approaches to embrace a combination of pro-business policies that promote labor market flexibility and investment as well as employment security initiatives around worker retraining and mobility to resolve the short-term distributional effects of globalization. These issues are analyzed with respect to the current situation.