There are many weapons used in a trade war. The two used most often are complaints to the World Trade Organization or unilateral changes in tariffs against a trading partner, as we have seen with the US and China. Non-tariff trade barriers are often more potent and can be used with relative stealth. One such non-tariff barrier, often used on people-centric industries, is a restriction of the free movement of labour. India still gets about 70% of US H-1B visas issued each year. US consulates in India have considerable latitude. They can act on Washington’s orders to tighten up the H-1B regime without any drastic change in US immigration laws. Other similar “work permit" rules in countries such as Australia, Singapore and the UK also vary over time.

I spoke recently with Viju George of JP Morgan, a veteran information technology (IT) sector analyst, whose insights I respect. George has strong data to back his conclusions. His analysis of the H-1B situation reveals that the rejection rate of H-1B visas has sharply increased for Indian IT since 2015. The rejection rates as of April 2019 of H-1B visas filed for by Infosys, Tata Consultancy Services and Cognizant have risen to 35%, 33% and 39%, respectively, versus 2%, 4% and 4% in 2015. The visa rejection rate for India’s TWITCH providers (TCS, Wipro, Infosys, Tech Mahindra, Cognizant and HCL Technologies) between September 2018 and April 2019 has spiked to 36%. This is astoundingly high, nine times higher than 2015’s rejection rate of approximately 4%.

Tier-I Indian IT firms are not alone in facing such H-1B denial rates. The authorities have also applied the whip to global IT services firms operating in India such as IBM, Accenture and Deloitte. It appears that the US Citizenship and Immigration Services (USCIS) authorities are judging the offshore/on-site IT Services business model as taking undue advantage of H-1B visas, regardless of the firm’s heritage.

What is most alarming is that the acceptance rate of applications for extensions from people who are already working on H-1Bs in the US is also sharply declining. It is harder to substitute on-site H-1B resources already working at a client site with local resources at short notice. This is to say nothing of the human costs that affect workers who are suddenly uprooted from the US and have to relocate to India with their families. The US is no longer seen as a plum posting by senior IT services employees.

Big Tech players such as Google, Microsoft, Facebook and Intel have far lower denial rates. These are still in single-digit percentages. In absolute terms, they are receiving increasing approvals. Captives such as Walmart and Goldman Sachs also have very low denial rates. Clearly, the USCIS does not view such players as “unfair" H-1B users. According to George, many of their applicants hold US Masters’ degrees and command much higher pay packets than their IT Services counterparts—more than a 50% premium. Also, while about 70% of Big Tech employees applying for H-1Bs have Masters’ degrees, the picture for IT Services employees is inverted. Only 30% of them have Masters’ degrees. It appears that both lower pay and applicants without higher degrees are frowned upon by the USCIS.

US wages have been stagnant for more than a decade. Inflation has also been low, but real wage appreciation is largely absent. The current administration’s desire to push up middle-class wages, since it is this class that votes in large numbers, may be driving its current approach. However, tech, which has near zero unemployment, is probably the wrong sector to choose. Such knee-jerk methods are ineffectual and will end up hurting the US economy in the long run.

The question is whether these rejection rates are high enough to impact the bottom line or delivery operations of IT services firms. As is evident from several providers’ earnings announcements, George sees an impact on costs already but not yet on operations. Yet, if rejection rates continue to rise, can India’s IT players manage the operational risks that go with interrupted service delivery to customers? George’s analysis suggests that such risks will manifest themselves if rejection rates for H1B visa extensions approaches 45%. At the current rate, he says we will hit this point in less than two years.

How, then, can providers mitigate the operational risks if visa denial rates keep rising? Apart from increasing local hiring at higher costs, IT services firms have to structurally change their delivery methodologies to cope with visa pressures. Methods such as location-independent Agile development, extreme offshoring, and automation with bots are some of these.

Such a structural change will take time to play out. For example, location-independent Agile, a new-age delivery system, can be revolutionary since its development today needs team members playing multiple, parallel roles, which is more easily accomplished when they are co-located. Another method is extreme offshoring, where more than 90% of resources sit offshore. Predictable, longer-term annuity engagements are more amenable to this method. Third, the use of bots, instead of human employees, can reduce the reliance on visas for people.

There is increasing buy-in from clients for new delivery models if their execution is satisfactory. Firms have just started on this journey and the results will take time. That said, I have seen the industry face structural problems before, dust itself off and carry on.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on tech