Reliable data on the extent of offshore state contracting, however, is sparse. This lack of data is largely due to the failure of most states to track where their contractors perform the work after the state awards the contract. Notwithstanding the lack of data, it is clear that a majority of states have contracts with vendors that use offshore labor to provide state services, although the extent of such offshoring varies widely by state. Indeed, state procurement officials are sometimes unaware of the use of offshore labor in state contracts. As a result, the scope of state offshore contracting is best addressed through anecdotal press accounts, research studies, and government reports. Some highlights include:

• The Government Accountability Office reported that states spend 18% of total contract expenditures for Child Support Enforcement, Food Stamp, Temporary Assistance for Needy Families, and Unemployment Insurance on offshore contracting.
• The Charlotte Observer noted that South Carolina awarded a $2.5 million contract to a firm that planned to use workers in India to build the state’s unemployment tax system.
• A Pennsylvania contractor, according to the Rutland Herald, used workers in India and Mexico to operate a state welfare call center.
• Nebraska, as highlighted by the Lincoln Journal Star, awarded a $600,000 state contract to J.P Morgan, which used workers in India and Mexico to handle food-stamp calls.
• The Governor of Georgia has allowed foreign vendors to bid on $600 million worth of outsourced state IT spending, according to a report of the Atlanta Journal Constitution.
• The Massachusetts State Teachers Retirement Board, as noted in a report by a labor-funded organization, awarded a $3 million contract to an information technology company that performed work for the Board in India.

The examples go on and on.

But, when the media exposed these instances in the 2004 election, lawmakers in virtually every state introduced legislation to restrict state contractors from performing work outside of the United States. In December 2003, offshoring legislation had appeared before only four state legislatures; by early 2004, nearly 100 such bills were pending in state legislatures across the nation. And by the end of 2004, that number grew to more than 200 bills in over forty states. Five of those bills became law, including a Tennessee statute authorizing state officials to implement preferences for service contracts that would be performed within the United States. Then during 2005-2006, state lawmakers introduced approximately 190 bills on the subject of offshoring, ten of which became law. Several more passed state legislatures but were met with vetoes. Among the new laws were Colorado, Illinois, and North Dakota statutes giving preference to domestic products, a North Carolina contract location disclosure law, and New Jersey’s infamous Senate Bill 494, a highly restrictive offshore contract ban. Between 2006-2008, although the number of bills state legislators introduced declined, significant state legislative action aimed at restricting offshoring continued. A number of governors have also issued executive orders banning offshore contracting.

This piece argues, however, that state restrictions on offshore state contracting are unconstitutional. In short, state offshore contracting restrictions violate the Foreign Commerce Clause of the U.S. Constitution. Under the Supreme Court’s heightened scrutiny of state regulation of foreign commerce, such restrictions are invalid because they facially discriminate against foreign commerce and prevent the federal government from speaking with “one voice” in international trade. By intruding into the sensitive area of international trade, states undermine national trade policy, frustrate international trade relations, invite retaliation, and embarrass the nation. Moreover, states cannot take shelter in the “market participant” exception to the Interstate Commerce Clause because the exception does not (or should not) apply to the Foreign Commerce Clause. Furthermore, even if the exception does apply, state offshore contracting restrictions fail under the doctrine of foreign affairs preemption.

Application of these constitutional principles to state offshore contracting restrictions leads to a curious outcome. If a state places a contract into the stream of commerce, the Constitution renders the state virtually powerless to prevent its contractors from using offshore labor. But this legal conclusion begs the question: does this result make for good public policy? On the one hand, proponents of offshore contracting argue that offshoring is too advantageous for state governments to pass up because it has the potential to save them a significant amount of money. On the other hand, opponents of offshore state contracting argue that it threatens the very nature of state government. At a time when states are seeking to stimulate the local economy, many believe that performing state services abroad exacerbates unemployment by depriving Americans of government jobs.

In the end, two solutions exist for states to prevent offshoring of their state contracts without violating the Constitution. Either the state withdraws certain contracts from the stream of commerce, or Congress sanctions state offshore contracting restrictions. Accordingly, a state that seeks to privatize and ensure that the jobs stay in the United States must seek authorization from Congress. In this regard, the nation should engage in a serious debate about whether to permit states to enact these restrictions, given the challenges that offshoring might pose for state governments. Congress must recognize the states’ traditional role as guardian of their citizens and balance this against the benefits of uniform trade regulation and liberalized procurement. Before this debate can occur, however, federal and state governments must commit to comprehensively studying the issue of offshore contracting because solutions, if any, depend on the availability of data. At present, the nation knows too little about the consequences of offshoring. Most states do not track the location of contract performance, and state proposals to restrict offshore contracting are often accompanied by more political rhetoric than economic analysis.
 

Acknowledgments:

Copyright © 2009 Cornell Law School.

Michael A. Zuckerman is a J.D. Candidate at Cornell Law School.

A special thanks to Max Baigelman, Megan Belkin, Eric Finkelstein, Jared Levin, Brendan Mahan, Omari Mason, Sue Pado, Michael Page, Kate Rykken, Andrey Spektor, Carter Stewart, Etienne Townsend, Rachel Weiss, and, of course, my parents Sheri and Sherwin Zuckerman. Cornell Professors Bernadette Meyler, Trevor Morrison, and Mildred Warner also provided valuable feedback on earlier drafts.

This Editorial is based on the following full-length student Note:   Michael A. Zuckerman, The Offshoring of American Government, 94 CORNELL L. REV. 165 (2008). Click Here for the Full Version