Obama’s Outsourcing and Offshoring Promotion Program
Posted February 28, 2013 by Bierce & Kenerson, P.C. · 
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President Obama’s current programs are very likely to limit growth of small businesses to mid-sized businesses and will promote automation, “right-sizing,” outsourcing and offshoring in 2014. We examine some of the key themes in his tenure as President since 2009, particularly those in his State of the Union Address on February 12, 2013. Outsourcing and offshoring might be increased as a result of his policies on healthcare, energy taxation, energy infrastructure investment, higher local U.S. wages and even new regulations on cybersecurity.
Burdening Both Small and Larger Businesses): Bye-Bye, Back Office Employees; Hello, New Small Service Providers. The Patient Protection and Affordable Care Act of 2010 is pushing small business owners to cut back on full-time employee staffing. The law is over 1,000 pages long. Among its key provisions is a mandate for individuals to get medical insurance (or pay a tax of $2,000). Another key mandate requires U.S. employers with over 50 full-time employees to pay for coverage for their employees, effective January 1, 2014. (Incidentally, as of March 1, 2013, U.S. employers must now disclose to their employees in writing whether the employer has obtained medical insurance for the employee.)
Under these conditions, outsourcing will grow because the back office (finance, accounting, human resources administration) does not generate revenue and thus cannot be leveraged for purposes of valuation. We predict a boomlet of new small service providers offering such services, with the real work being done in foreign countries under the supervision of U.S. founders. For a well-designed new service provider, startup costs are modest and return on investment can be recovered within six to twelve months by leveraging a scalable offshore service delivery center.
Even if such outsourcing is not so robust, small business owners will seek to enter into new “independent contractor” agreements with current back office employees to kick them off the payroll and keep the business size at below 50 FTE’s.
Favoring Foreign Manufacturers and Service Providers: New Tax on U.S. Energy Consumption, No Tax on Products of Foreign Energy Consumption. President Obama wants a carbon tax on energy consumption. A draft law failed in 2010. Now, if Congress does not act, he will administratively issue regulations to “reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.”
If such a carbon tax is enacted, it will apply only to U.S. producers of energy and other greenhouse gas (GHG) emissions. The tax would not apply to foreign energy producers or foreign GHG emissions. The tax would not be applied to the importation of finished products from countries that have not such tax. So such a tax would increase the cost of U.S.-made products (and energy consuming services such as office workers) and also promote the importation of foreign-made goods and foreign services that are not so taxed.
Promoting Foreign Jobs along with American Jobs: Upgraded U.S. Energy Production Infrastructure. President Obama approves the hiring of U.S. workers by foreign companies in the U.S. “The CEO of Siemens America — a company that brought hundreds of new jobs to North Carolina — said that if we upgrade our infrastructure, they’ll bring even more jobs. And that’s the attitude of a lot of companies all around the world. And I know you want these job-creating projects in your district.” It’s not clear where the R&D work or manufacturing will take place for energy projects, but the U.S. does have some obligations under WTO agreements to treat certain foreign manufacturers equally.
Comparative Advantage for Automation: Higher Minimum Wages, Maybe More Automation. “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.” By increasing the cost of labor, this could promote capital investment in machines and software that could replace labor.
Cybersecurity: Sharing of Private Data with U.S. Government. In his speech, President Obama viewed cybersecurity of critical infrastructures as essential to national security. “And that’s why, earlier today, I signed a new executive order that will strengthen our cyber defenses by increasing information sharing, and developing standards to protect our national security, our jobs, and our privacy.”
His Feb. 12, 2013 Executive Order to Improve National Cybersecurity will establish a “voluntary information sharing program” that will “provide classified cyber threat and technical information from the Government to eligible critical infrastructure companies or commercial service providers that offer security services to critical infrastructure.” Under this Executive Order, the term critical infrastructure means “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.”
The regulations implementing this “voluntary” program have not been drafted. A draft law on the same subject failed in 2012 because “voluntary” sharing did not come with insulation from liability to third-party stakeholders such as customers, individuals, patients, suppliers and others.
We can speculate whether the eventual regulations will promote offshoring of data centers or more virtualization of data services. It could have the opposite effect, of forcing full supply-chain cybersecurity across national borders. It could result in more segregation of data collected overseas and hiving off of such data so that it is not processed in the U.S. in order to avoid potential liability from complying with the new regulations.