Why should Labor worry about that?

Well, for one thing, what's true of the US often ends up being true of Australia.

In this case, both economies have been hit by the same "trade cost" reducing information technology revolution.

Much more to come

As Alan Blinder, a former vice-chairman of the US Federal Reserve, warned years ago, "the cheap and easy flow of information around the globe has vastly expanded the scope of tradeable services, and there is much more to come".

AFR graphic

At the same time governments are removing artificial barriers to services trade and, despite the understandable discomfort of the unions, there's no going back, or even standing still.

Manufacturing is migrating from the high-income economies to China and the other emerging market economies at a phenomenal rate. Countries like Australia are becoming ever more dependent on their huge service sectors and on the growth of international trade in services.


But if we want to sell our services to the emerging market economies we must be willing to buy their services in return.

That's a trade that will make Australians better off, but of course there will be losers, and among them are likely to be the construction and public sector unions.

However, the disruption signalled by this American research is not just because of the well-known frictions of traditional trade expansion.

The increased exposure to global competition will push more service industries to join manufacturers in various kinds of offshoring.

Nature of trade changing

The technological change that facilitates international trade in services also facilitates trade in specific "tasks". The nature of trade is changing.

"When instructions can be delivered instantaneously, components and unfinished goods can be moved quickly and cheaply, and the output of many tasks can be conveyed electronically, firms can take advantage of factor cost disparities in different countries without sacrificing the gains from specialisation," Princeton University researchers warned at the end of last decade.

And they have, both by contracting out to businesses in places like the Philippines and by joining the rush to form global value chains.


When 10 years ago the Organisation for Economic Co-operation and Development predicted that up to 20 per cent of Australian jobs eventually could be subject to the direct foreign competition of offshoring, it sounded alarmist. It doesn't sound so alarmist now.

The fundamental change in trade and the labour markets of countries like Australia has been decades in the making.

Business in the US and Australia learned the art of outsourcing before the IT revolution. It wasn't easy, as business and governments came face to face with the "implementation risks" of contracting out.

But by painful trial and error, and without fully realising it, businesses and governments were preparing themselves for the bigger challenge and opportunities of outsourcing into the emerging market economies.

Competitive advantage

Now, of course, you encounter offshoring everywhere. Back-office jobs in manufacturers, banks, newspapers and accounting firms are disappearing into the cheaper labour markets of Asia. Moreover, the proliferation of global value chains is part of the shift of the centre of economic gravity towards emerging market economies. The competitive advantage in tax rates and labour costs of these economies are closely related. Low tax rates are possible because of the absence of the strong social safety nets which, in the advanced economies, add to effective minimum wages of unskilled workers.

In Australia, the transition to more globalised labour market still has a good way to go. The OECD's list of Australian jobs potentially affected by offshoring range from the obvious clerks and telemarketers to accountants, urban planners, medical imaging professionals, architects, engineers and scientists.

As with international trade more generally, the impact of offshoring on employment will depend on its impact on the employers. Not all low-skilled jobs can be shifted overseas. If lower production costs from offshoring allow employers to expand their output, there will be some offsetting increase in unskilled employment in Australia.

However, in a skill and capital-intensive economy like Australia, it is the least-skilled workers who are first in the firing line as trade expands.

The unions can do little more than play Canute against that tide.