The outsourcing spectre returns

The outsourcing spectre returns

The familiar election-time rant of protecting US jobs is back, as that country heads for congressional mid-term elections in November. The most recent series of concerns about jobs came last week, when President Barack Obama announced withdrawing tax breaks that “encourage companies to create jobs and profits in other countries". Striking a very nationalistic note, Obama declared “a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do right here in...the United States of America". And, in yet another move that should enhance the level of discomfort among foreign firms, he announced his intent to propose that “all American businesses should be allowed to write off all the investment they do in 2011" which, in his view, would encourage US businesses to “start putting their profits to work" in the home country.

President Obama’s intent to “protect" US jobs comes even as a new controversy rages over the ban on outsourcing services imposed by governor of Ohio state Ted Strickland in early August. An executive order that Strickland issued prohibits the use of any funds within the control of an executive agency to purchase services that will be provided outside the US. Besides the impending loss of business, this order will surely raise hackles for the major beneficiaries of offshoring activities: There could be longer-term implications, considering Ohio’s state administration has gone on a virtual tirade against offshoring services.

The executive order points out that the purchase of offshore services has unacceptable business consequences—because offshore service providers could pose unacceptable data security, and thus expose US firms to privacy and identity theft risk. The order alludes to pervasive service delivery problems with offshore providers, including dissatisfaction with the quality of their services; it adds that it is difficult and expensive to detect illegal activity and contract violations and to pursue legal recourse for poor performance or data security violations. It’s actually hard to believe that Strickland put this ban into effect; ironically, at the beginning of the year, he was offering millions of dollars of tax breaks to persuade Tata Consultancy Services to invest in his state.

The first of this latest set of measures to protect US jobs was the hike in fees for a class of visas that includes H-1 and L-1 non-immigrant visas, which generated senator Charles Schumer’s now infamous “chop shop" remark about outsourcing companies such as Infosys; the US has imposed these fees since June for raising revenue to increase security on the US-Mexico border. For Indian firms that have been at the forefront of providing services to the US economy through the temporary movement of professionals, this hike in visa fees is yet another impediment in the series of market access barriers that they have had to contend with since the economic downturn.

The pitch for introducing restrictions on inflows of non-immigrant workers in the US was set in 2009 when senators Dick Durbin and Chuck Grassley proposed to introduce the H-1B and L-1 Visa Reform Act, 2009. This was a narrowly tailored bipartisan legislation that sought to amend the US Immigration and Nationality Act to prevent “abuse and fraud" and to “protect American workers". The target of the legislation: the 65,000 visas that the US issues to highly skilled non-immigrant workers. Before the onset of the current crisis in 2007, the US Citizenship and Immigration Services received 150,000 petitions for H-1B visas within the first two days of its opening applications.

But the situation changed dramatically after US lawmakers started tightening regulations in 2009. The invidious protectionism had a chilling effect on H-1B petitions. The quota for 2010 could not be completed even in December 2009; in 2010, the total number applications being considered for the grant of H-1B visas is less than 37,000.

What should be India’s response to this situation? The increase in visa fees has prompted many to suggest that India should file a complaint at the World Trade Organization (WTO) with a view to seeking redressal through its dispute settlement process. Several analysts have argued that strengthening regulations pertaining to non-immigrant workers, which would result in raising market access barriers, would violate the commitments made by the US under the WTO’s General Agreement on Trade in Services. However, it needs to be pointed out that litigating at WTO, besides surrounded by uncertainties regarding the outcomes, has implications for Indian industry because the cases can drag on for several years. Most of the firms in India’s sector, in particular those that are involved in the outsourcing business, are of modest size, and therefore do not have the capacity to stomach legal bills for a long time.

It is, therefore, imperative that India uses forums such as the Group of Twenty (G-20) to strongly argue that major economies desist from taking measures which risk the global economy’s fragile recovery. Indeed, G-20 countries have repeatedly expressed their commitment to keep their markets open. Any move to the contrary, made by the largest economic power, threatens to unravel this consensus.

Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.

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