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Bush and Kerry agree: Offshore is bad
The president and Democratic front-runner score political points by decrying "Benedict Arnold CEOs."
February 25, 2004: 2:11 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - Let me get this out of the way: I'm a registered Democrat. But I cringe when I hear Democratic presidential front-runner Sen. John Kerry talk about how he'd combat the growing number of jobs headed to foreign countries. I think his proposals would have disastrous consequences if enacted.

Technology industry targeted

The technology industry now finds itself at the center of the offshoring tempest. President Bush has made it clear that he's willing to ban the use of offshoring for some federal contracts, and he's taken his economic adviser Gregory Mankiw to task for his pro-offshoring comments.

With opposition coming from both political parties, firms like Dell (DELL: Research, Estimates), Hewlett-Packard (HPQ: Research, Estimates), IBM (IBM: Research, Estimates), Intel (INTC: Research, Estimates), and the many others that engage in offshoring will be squirming through the election season. Offshore outsourcing is the first crucial test for the tech industry, which is still a little wobbly from the recent recession.

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To be sure, Kerry's crafted a catchy phrase -- "Benedict Arnold CEOs" -- that will get him some attention, which may be all he wants at this point. But it's troubling to see Kerry come out guns ablazin' on a topic as critical and nuanced as offshore outsourcing, apparently without having fully considered the potential consequences of rhetoric.

"It's an unfortunate choice of words," says Harris Miller, president of the Information Technology Association of America.

"I'm personally curious to see whether [Kerry] solicits and receives funds from folks he seems to deem traitors," says Bruce Mehlman, executive director of the Computer Systems Policy Project. Both Miller and Mehlman acknowledge that they're no more comfortable with the White House's opposition.

Sayonara, tax credit

At this point, the specifics of Kerry's plan are few. As far as I can tell from reading his position papers and speaking with a campaign staffer, the plan would eliminate tax credits for U.S. companies that practice offshore outsourcing.

"John Kerry will repeal every tax break and every loophole that rewards any Benedict Arnold CEO or corporation for sending jobs overseas," a spokesperson in Kerry's California camp told me.

Currently, companies that engage in offshore outsourcing pay taxes in the countries in which they outsource, and then pay the United States the difference between those countries' tax rates and the 35 percent U.S. corporate tax. The companies receive U.S. tax credits for the taxes paid in foreign countries, so they're not taxed twice on the same income.

Eliminating the foreign tax credit would "make it impossible for U.S. companies to do business abroad," says professor James Hines, research director for the office of tax policy research at the University of Michigan. "If he's talking about eliminating the foreign tax credit, it's ill-advised policy."

Despite multiple discussions with Kerry's spokesperson, I was unable to clarify by press time if this is indeed the candidate's policy.

A complicated issue

Sounding the protectionist alarms is an easy way to gain political capital on offshoring. This is obviously an emotional issue; I was deluged with more than 300 e-mails in response to my last outsourcing column.

I think any kind of protectionist plan is on the wrong side of history, though I do have one important caveat: Any acceptance of free trade should be coupled with a vigorous reinvestment in education and worker training in the United States.

Fresh from its struggle through the recession, the technology industry now finds itself in a serious fight over a practice that helped bring it out of the downturn. Popular sentiment is against the industry here, but economic history is on its side.

Technology (general)
George W. Bush
John F. Kerry
International Trade

Time and time again, sectors like tech have maintained their strength through innovation, and the enemy of innovation is protectionism. How the industry maneuvers its way through this political minefield could very well shape the speed and scope of technology's economic recovery.

The CSPP's Mehlman acknowledges that getting the tech industry's message out in the midst of election-season hysteria will take "a lot of shoe leather."

But, he says, "the fact is, innovation and trade and technology have helped our economy lead the world and will do so in the future."

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