Will Protectionism Help?

Taking an anti-outsourcing stance, the US president Barack Obama has lashed out on US companies outsourcing business

to India for unfair business practices. "If you are a business here, entirely located in the United States, and investing in the United States, and hiring workers in the United States, you are paying a 35 percent rate. If you are a multinational and you are investing in India, and your workforce is in India, and your plants and equipment are in India, but your headquarters are here, you are taking deductions on all the expenses in India, but you are keeping your profits outside the United States, that just doesn't seem entirely fair," Obama said.

Stating that his intention behind imposing tax on firms shipping jobs overseas was to provide a level playing field, Obama said that these firms are taking undue benefits of the new tax systems. "The same is true where you have companies that have 90 percent of their sales in the United States, but are posting 90 percent of their profits overseas. You get a sense there that the accountants have been busy," he said.

Obama said that some of the tax proposals were modified based on the legitimate concerns of the some of the firms. "Some US companies had then pointed out, well, we may be investing a lot in R&D here in the United States, but we have got to have factories or sales forces outside the United States, and you don't want to discourage [companies] from doing that," he said.

Obama said taking note of "some legitimate concerns" about a similar proposal last year, "we made modifications around some of these proposals."

India is among the world’s top five outsourcing destinations, along with the Philippines, Ireland, China and Brazil, according to a Tholons report. India earned revenues of $40 billion from IT-BPO export services in 2008, with the US accounting for 50-60% of the Indian IT companies' revenues.

The country's largest IT exporter by sales Tata Consultancy Services has fallen 3.3% at Rs 715, Infosys has shed 2.7% at Rs 2425 and Wipro has weakened by 4.9% at Rs 640 after Obama’s first State of the Union address that he will make creation of local jobs his top priority in 2010, and hinted that his government could end tax breaks for companies creating jobs overseas.

This is not the first instance of Obama upping his anti-outsourcing rhetoric. In May last year, he had said American companies’ shipping jobs overseas will be required to pay more taxes and that tax-deferral benefits for such companies will be ended. "It’s a tax code that says you should pay lower taxes, if you create a job in Bangalore, India, than if you create one in Buffalo, New York," Obama had said.

Som Mittal, president of The National Association of Software and Services Company (Nasscom), India’s association of software exporters, said Obama has several short- and long-term pressures to cope with, but that does not mean any significant impact for the outsourcing industry. "We will be their solution and not the problem," he said in an interview.

India’s nearly $60-billion outsourcing industry remains hopeful that its top export market will continue to grow with more companies seeking to cut costs by outsourcing work to low-cost locations. The proposed ‘jobs bill’, which is aimed at creating more local employment in the US, is focused at reviving manufacturing, retail and construction jobs. Obama also mentioned that his government would double America’s exports and also work on the bilateral trade agreements. "These cannot be achieved by following protectionism," said Mittal.

Experts argue that such protectionist measures are shortsighted because many US companies derive significant revenues from outside the country, and any protectionist stance could lead to a backlash in other markets. Some of the top outsourcing customers, include Citigroup, GE and JP Morgan.

For instance, Citigroup in 2007 generated 52% of its revenues outside the US, and over 60% of its workforce operated from abroad, as its banking business spanned 100 countries. Citigroup’s international revenues stream kept pace through 2008, despite the financial crisis, and amounted to a whopping 74% of the total revenues. Outsourcing experts such as Rodney Nelsestuen, senior research director at USbased TowerGroup said with top US banks seeking to reduce their operational expenses outsourcing could rise, and not contract as feared.

"Outsourcing will increase as a measure to reduce operating costs to offset other cost increases such as a (still not approved but only proposed) new tax," said Nelsestuen. "The pass-through of an additional cost of business will likely be distributed throughout the customer and supply chain, resulting in higher cost financial services, lower margins, strategies to reduce operating costs, here is where outsourcers will see an expansion of outsourcing, not a contraction," he added.

Indeed, when Obama proposed that he would attempt to recover over $100 billion from top US banks by introducing new taxes, local sourcing experts said there was no clarity on such proposals to analyze any impact on offshoring. "Increased tax could lead to generally lower investment and greater cost reduction initiatives (such as offshoring)," said Andy Efstathiou, director of US-based research firm NelsonHall’s banking sourcing program. Then there comes the issue of amendments to the law allowing hiring of employees through the H1b visas.

A statement from Nasscom said that it is 'working closely with stakeholders and policy makers in the US Congress' and the administration to ensure that the Indian IT industry is not disadvantaged in any manner due to it.

A team of six officials of Nasscom visited the US to prevail upon them over the visa issue and also over the proposed 'Buy America' measure of the Obama administration.

The delegation met senator Charles Grassley, belonging to Iowa, who is spearheading the H-1 B legislation. Nasscom would be working with him to ensure that any fraudulent use of the H-1 B visas are apprehended and stopped and ensure legitimate business users are not affected.

The industry body said the only 11% of the total visas issued last year was to the Indian IT industry. The delegation also met a large cross section of stakeholders from the US administration, elected representatives of the Congress, various associations, US headquartered companies and customer companies.

"Having met with various stakeholders and experts and discussed the protectionist measures with them, Nasscom does not see the "Buy America" clause or the discussion on removal of "tax breaks for US companies that create jobs offshore" provisions in their current forms having any impact on the Indian ITBPO industry. We are confident that US will consider all factors as they have in the stimulus bill and other proposed initiatives for reviving the economy and employment," the statement said.

"The Indian IT-BPO industry has played a crucial role in helping US companies tap these benefits and remains committed to being a part of the solution to help tide over this crisis It is imperative that the US and all countries continue to be proponents of free trade. With more countries impacted with the slowdown, such protectionism would trigger similar protectionist measures. The world economy will find it difficult to reverse this trend quickly. Restricted trade affects businesses, incomes and employment in other countries thus resulting in lower spending and subsequently lower demand for US goods and services globally," it added. The slots for H1B visas for 2010 were finally filled on December 21, 2009 making it the longest time it has taken to meet the quota in five years. In the previous two years, these slots were filled within two days of applications being accepted in the beginning of April.

There are 65,000 such visas available annually. Indians have typically accounted for over a third of H1B visas granted in recent years.

This decline in interest could well scupper years of lobbying efforts by major US companies including Microsoft to increase the cap with most seeking a doubling of the numbers. The tone against H1Bs has become strident in recent months with a Bill being introduced in late November seeking to prohibit American companies that lay off workers from hiring people on visas such as the H1B.

However, immigration proponents believe such measures may prove counterproductive. Richard Herman, co-author of recently-published Immigrant, Inc., said, "In the new economy, immigrants are disproportionately doing technology innovation and commercialization."

Vivek Wadhwa, a professor at Duke University, sees anti-Indianism. "This anti-H1B sentiment is directed at Indians. This is racism at its worst and they’re targeting Indian immigrants with this," he said.

And it is not just India, which is bearing the brunt of Obama’s policies. On the eve of the inauguration of Barack Obama as US president, German Chancellor Angela Merkel sent a warning to the US against the temptation to fall back on protectionist trade policies as a way out of the global financial crisis. Speaking at a meeting of the National Association of German Industry (BDI) in Berlin, Merkel said that after the excesses of the recent past, especially in financial markets, it was time to set up a global regulatory system which contains the essential elements of a social market economy. It was important to engage with Obama so he realizes the correct consequences to be taken from the crisis, Merkel said.

Canadians cheered when Obama won but his Democratic party's "Buy American" tilt imposed a midwinter chill on the relationship with the economic stimulus bill passed by the House of Representatives requiring that only American steel can be used in public works funded by the package thereby affecting the exports from Canada’s steel industry to say the least.

Similarly Mexico announced its intent to raise tariffs on 90 U.S. products. Mexico retaliated for a protectionist measure tucked into the omnibus spending bill President Obama signed. The measure shut down a pilot program to open U.S. highways to Mexican trucks. That program honors a commitment to Mexico under the 1994 North American Free Trade Agreement. All Mexican trucks on U.S. highways must meet U.S. regulatory standards, so there are no legitimate safety issues.

While the policies may or may not speed up economic recovery in the US, it is certainly antagonizing other nations who have in the past contributed to the growth engine of America. [By D. Dave]